USD CPI (YoY) (NOV) (13:30 GMT; 08:30 EST)
Expected: 4.1%
Previous: 3.5%

USD CPI (MoM) (NOV) (13:30 GMT; 08:30 EST)
Expected: 0.2%
Previous: 0.2%

How Will The Markets React?

US economic data is expected to show that US CPI data rose to an annual rate of 4.1% its highest level in more than two years and well above the Fed comfort zone of 2%. With oil prices nearly reaching $100/bbl energy costs are likely to have been a major contributor to headline increase in price levels. Excluding food and energy, the CPI reading is expected to print at a more tolerable 2.3% - still an increase from last months 2.2% reading. Although energy prices receded slightly off their peak, they remain stubbornly high and the flow through effects of these prices may become more persistent in the future. In the meantime if the CPI data prints event hotter than the already elevated market expectations, it may temper any further rate cut expectations from the Fed as the inflationary pressures may outweigh concerns about the slowdown in the US economy.

Bonds – 10-Year Treasury Note Futures

Treasuries continued to test their recent high intraday highs as news of the coordinated central bank plan to ease Libor rates continued to resonate throughout the markets. A hotter than expected CPI data, however, could send bond prices tumbling as fears of strong inflationary pressures would likely send traders to sell fixed income instruments.

FX – EUR/USD

After making early London highs of 1.4730 following hotter than expected French CPI data, EUR/USD slid for the rest of the session, pressured by equity market decline which sent the pair lower on increased risk liquidation. The downward move however was contained near the 1.4680 level as the single currency continues to elicit support on interest rate differential basis. With US PPI and Retail Sales data printing much stronger than anticipated however, the EUR/USD could come in for more downside pressure as fears of serious slowdown in US economy recede from the horizon.

Equities – Dow Jones Industrial Average

The Dow created a massive disappointment yesterday opening up more 250 points higher only to reverse almost all of its gains. The stock indices clearly remain in a consolidative phase exacerbated by wide ranging volatility. The price action suggests that equities may still make a run for the upside but the resistance at 14.000 remains formidable.

Terri Belkas is a Currency Strategist at FXCM.