US CPI, WHERE WILL THE DOLLAR GO NEXT
Trading Plan
BASELINE
Current Short-Term Sentiment Bias:
- The market is currently focused on the upcoming US inflation report and its implications for Federal Reserve policy.
- There is an 86% probability priced in for a 25-basis-point rate cut by the Fed later this month⁵.
- The dollar index is steady around 106.3, reflecting cautious sentiment ahead of the inflation data.
SURPRISE
Outcome That Will Surprise the Markets Based on the Baseline:
- Lower-than-expected inflation data: This would likely lead to USD selling as markets fully price in the anticipated rate cut. A good trade in this scenario would be GBP/USD longs, leveraging the pound's net long positions and the USD's net short positions.
- Higher-than-expected inflation data: This would likely result in USD strength as investors adjust their rate cut expectations. A good trade in this scenario would be EUR/USD sells, based on stronger USD institutional positioning compared to the EUR.
BIGGER PICTURE
Does This Outcome Change the Larger Macro-Fundamental Bias?
- Lower-than-expected inflation: Reinforces the expectation of continued easing by the Fed, aligning with the current macro-fundamental bias of a dovish Fed aiming to support economic growth and achieve its 2% inflation target.
- Higher-than-expected inflation: Could shift the macro-fundamental bias towards a more cautious Fed, potentially delaying further rate cuts and maintaining a tighter monetary policy stance to combat persistent inflation⁷⁸.
Notes
- Macro-fundamental bias: The market expects the Fed to continue easing monetary policy to support economic growth and achieve its inflation target. This expectation is based on the Fed's dual mandate and recent economic indicators.
- Short-term sentiment bias: The market is currently focused on the upcoming US inflation report and its potential impact on Fed policy, as well as interest rate decision.
BASELINE
Current Short-Term Sentiment Bias:
- The market is currently focused on the upcoming US inflation report and its implications for Federal Reserve policy.
- There is an 86% probability priced in for a 25-basis-point rate cut by the Fed later this month⁵.
- The dollar index is steady around 106.3, reflecting cautious sentiment ahead of the inflation data.
SURPRISE
Outcome That Will Surprise the Markets Based on the Baseline:
- Lower-than-expected inflation data: This would likely lead to USD selling as markets fully price in the anticipated rate cut. A good trade in this scenario would be GBP/USD longs, leveraging the pound's net long positions and the USD's net short positions.
- Higher-than-expected inflation data: This would likely result in USD strength as investors adjust their rate cut expectations. A good trade in this scenario would be EUR/USD sells, based on stronger USD institutional positioning compared to the EUR.
BIGGER PICTURE
Does This Outcome Change the Larger Macro-Fundamental Bias?
- Lower-than-expected inflation: Reinforces the expectation of continued easing by the Fed, aligning with the current macro-fundamental bias of a dovish Fed aiming to support economic growth and achieve its 2% inflation target.
- Higher-than-expected inflation: Could shift the macro-fundamental bias towards a more cautious Fed, potentially delaying further rate cuts and maintaining a tighter monetary policy stance to combat persistent inflation⁷⁸.
Notes
- Macro-fundamental bias: The market expects the Fed to continue easing monetary policy to support economic growth and achieve its inflation target. This expectation is based on the Fed's dual mandate and recent economic indicators.
- Short-term sentiment bias: The market is currently focused on the upcoming US inflation report and its potential impact on Fed policy, as well as interest rate decision.
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