FX Watch: US CPI on watch to offer some answers to Fed’s next move

US consumer price index (CPI) on watch to offer some answers to Fed’s next move

Wall Street managed to regain some footing following its sell-off last week as the unwinding in tech stocks stabilises, but will likely trade with some caution in the lead-up to the US inflation data. Thus far, markets have been on the lookout for fresh cues to guide expectations around the Federal Reserve (Fed)’s next move, and the upcoming CPI data may offer some answers to that.

Expectations are for headline CPI to come in at 2.6% year-on-year, down from previous 2.9%, while the core aspect is expected to stay unchanged at 3.2%. Month-on-month, both headline and core CPI is expected to increase 0.2%.

While the balance of risks has clearly shifted from inflation to growth, market participants still would not want too much of a surprise on the inflation front. A significant upside surprise could trigger concerns around stagflation amid softer economic data, while a downside surprise could highlight growth risks. Any risk-off moves may remain more sensitive to a stronger inflation read however, given that markets are well-assured that the Fed is heading into rescue mode to support growth ahead.

For now, Fed rate expectations are firmly leaning towards a smaller 25 basis point (bp) cut next week. Little deviation in the inflation data from consensus will offer validation to the current rate pricing, which could see a follow-through of the current short-term momentum in the form of a drift higher for risk assets.

US dollar: Daily relative strength index (RSI) heading back to retest mid-line

The US dollar managed to stabilise following its recent sell-off, as a more measured 25 bp rate cut from the Fed in September is broadly priced to be sufficient in supporting growth conditions for now. Expectations that the rate-cutting cycle will take on a more gradual pace saw the US dollar recover 0.5% to start this week.

On the technical front, its daily RSI is eyeing a move to retest its mid-line, which it has struggled to reclaim since July this year. Any move above it may reflect buyers taking on greater control, with resistance potentially at the 102.00 level. The latest Commodity Futures Trading Commission (CFTC) data reveals that the aggregate US dollar positioning vs other G10 currencies is at its highest net-short positioning since July this year. While this suggests room for bearish sentiments to unwind slightly in the near term, it could also be too early to call for a reversal just yet.

USD/SGD: Hovering around February 2023 low

The USD/SGD is attempting to stay supported above the 1.30 level, hovering around its February 2023 low. A potential bullish divergence on its daily RSI may offer some room to stabilise for now, but any relief rebound could likely face some resistance at the 1.317 level. Generally, a prolonged consolidation at support may be a bearish sign as it reflects dip-buying efforts potentially being absorbed by sellers. Any breakdown of the 1.30 level could pave the way for the pair to retest the 1.282 level next.