JUNE 13 US Headline CPI (YoY) (MAY) (12:30 GMT; 08:30 EDT)
Expected: 3.9%
Previous: 3.9%

Core CPI (YoY) (MAY) (12:30 GMT; 08:30 EDT)
Expected: 2.3%
Previous: 2.3%

What Are The Markets Facing?

Upcoming US data is anticipated to suggest that the economy is facing one of the Fed’s worst fears: stagflation. Indeed, the markets are already well aware that expansion has slowed dramatically, and the jump in Thursday’s import price index reflects rocketing costs on goods shipped from abroad. Is this trickling down to the consumer level? Traders will find out on Friday. The US headline consumer price index for the month of May is expected to rise 0.5 percent to leave the annual rate of growth at 3.9 percent. A bulk of the increase will likely be the result of food and energy price gains, especially as oil surged from $110.03/bbl at the beginning of the month to a high of $135.09/bbl. Nevertheless, even core CPI is anticipated to show a 0.2 percent rise for the month and an unchanged annualized reading of 2.3 percent. If any of these figures surprise to the upside or downside, the markets will respond accordingly, especially as Federal Reserve officials have been sounding incredibly hawkish lately. In fact, futures are currently pricing in a 26 percent chance of a 25bp hike to 2.25 percent at the end of the month. With the markets remaining extremely jittery, any sort of US inflation data is likely to spark volatility.

Bonds – 10-Year Treasury Note Futures

Looking ahead to Friday, the release of US CPI provides ample event risk for the US dollar, as they are anticipated to show a rise in prices on a monthly basis, while the annual measures are expected to hold steady. We’ve seen that the US bond markets and the greenback have been very jittery on inflation-related news, so if CPI does not meet expectations dead-on, volatility could pick up substantially in both markets. Hot CPI numbers could weigh Treasuries down toward trendline support at 112-10, but on the other hand, weak CPI figures could send the contract surging toward 113-20.

FX – EUR/USD

EUR/USD continues to consolidate within a wide range, as the recent surge in the US dollar has led the pair to pull back sharply thanks to heavy verbal intervention by Federal Reserve and government officials and an unexpectedly strong jump in US Advance Retail Sales. In fact, retail sales rose by the most in 6 months during May, as the index jumped 1.0 percent from the month prior. Excluding autos, this figure was even more optimistic as the index surged 1.2 percent. A breakdown of the index shows broad-based gains, but the most notable one was that seen in the gasoline station component, which increased 2.6 percent from a month ago and 15.3 percent from a year earlier. Since this report is not adjusted for inflation, this rapid increase skews the headline reading a bit, as gasoline prices steadily rose above $3.50/gallon toward $4/gallon over the course of May. However, EUR/USD has since pulled back from the confluence of trendline and Fibonacci support near 1.5420, and given COT positioning for the US dollar, the pair could easily rocket higher.

Looking ahead to Friday, the release of US CPI provides ample event risk for the US dollar, as they are anticipated to show a rise in prices on a monthly basis, while the annual measures are expected to hold steady. We’ve seen that the US bond markets and the greenback have been very jittery on inflation-related news, so if CPI does not meet expectations dead-on, volatility could pick up substantially in both markets. Given the jump in energy and food prices during the month of May, there are upside risks for the headline CPI numbers and if the indexes are stronger-than-forecasted, EUR/USD could plunge below near-term support toward 1.5300. On the other hand, softer-than-expected figures could send EUR/USD rocketing up toward 1.5550 as traders cut back expectations that the Federal Reserve will implement a rate hike at the end of the month.

Equities – Dow Jones Industrial Average

Trading in the US stock markets continues to look jittery, as the Dow Jones Industrial Average consolidated above Wednesday’s lows and Fibonacci support at 12,062. Indeed, traders should keep an eye on financial market news, as indications of distress amongst financial institutions could trigger widespread sell-offs in the global equity markets (and for that matter, forex carry trades). Looking ahead to Friday, US CPI numbers could shake up the DJIA. The headline indexes are anticipated to show a rise in prices on a monthly basis, while the annual measures are expected to hold steady. However, if the CPI report reflects weaker-than-expected price growth, the DJIA could bounce toward 12,325. On the other hand, indications of mounting inflation pressures in the US economy could weigh the DJIA down toward the psychologically important 12,000 mark.

Terri Belkas is a Currency Strategist at FXCM.