Investors and traders are reluctant to take any bigger bets on either side of the market as the whole world is waiting for the most important data, which will be released tomorrow. The data is the US inflation number, and it is this economic number that is going to set the tone among investors and traders.
Blood Bath or Stellar Rally
Tomorrow, there are two important events unfolding that are going to set the trading tone for the rest of the month. Firstly, it is the US inflation reading, which is expected to rise to 3.4%—a number that is well above the Fed target of 2%. The US CPI y/y reading for the previous month was at 3.2%, and the concern over here is that this number has actually started to travel in the wrong direction, which means that rather than inflation moving to the downside, we are actually experiencing a number that has started to travel up. If the US CPI inflation data even matches expectations, I do not think that the US markets will be very pleased, and there are stronger chances of a further sell-off as investors will factor in less chances of a rate cut from the Fed.
If the US CPI number prints anything above the 3.4% for y/y reading, it is going to be a blood bath. Market sentiment will tank, and traders are likely to run for their lives. This is because there is already plenty of pessimism among traders who think that the Fed can't make another mistake, and given the strength of the US labour market, they have every single reason to delay the rate cut process.
Reaction
Gold: The yellow metal, which is already on fire and has been up more than 15% so far this year, is going to see some wild price action. So far, the move in the gold price has been mainly due to two reasons: first, the expectations around the Fed’s interest rate cut. Secondly, the on-going geopolitical tensions are pushing investors to actually look for a hedge, and there is no better hedge than gold. Even yesterday, when the markets were very much in a zombie zone, the gold price action was no short of Hollywood blockbuster movies’s price action.
If the US inflation data comes in hotter than 3.4%, then we are likely to see what most investors have been waiting for: a pullback. And the reason that we think that there will be a pullback and not actually a change in the direction of the current trend is the on-going heightened geopolitical tensions. A hot US inflation reading could easily push the price towards the level shown on the charts. However, if the US inflation number comes in better than forecast, then the current trend is likely to move even further.
