Faster US inflation, hawkish Fed speak could send dollar higher
Asian stocks are mixed while US equity futures are little changed after the S&P 500 and the Dow Jones Industrial Average indices posted new record highs on Tuesday. Investors have been willing to look past fears concerning the Delta variant, knowing that the global economic recovery appears resilient enough to overcome the worst of the pandemic, enabled by ultra-accommodative fiscal and monetary stimulus.
At this juncture, it is the paring back of such stimulus that is the key consideration for global investors. Discussion around the Fed’s tapering is all the rage among market participants and another major clue about its timing may come from the US inflation print due later today.
The July CPI is estimated to rise by 0.5% month-on-month, which would be its slowest increase in five months, while the year-on-year print is forecast to come in slightly lower than June’s figure of 5.4%. However, the risk is that Wednesday’s inflation prints continue to erode the Fed’s “transitory” narrative. This would give policymakers added reason to hasten its tapering process while strengthening dollar bulls’ quest for a new 2021 high.
Hawks in the driver’s seat … for now
Market participants will also be paying close attention to today’s scheduled speeches by Atlanta Fed President Raphael Bostic and Kansas City Fed President Esther George. Bostic has already done his part in ramping up the hawkish rhetoric by stating on Monday that the economy is “well on the road to substantial progress” towards the Fed’s goal.
George is another famed Fed hawk and is due to become a voting member of the FOMC next year. Another display of hawkishness today could increase hopes that she can rally more of her FOMC colleagues into ditching their dovish stances and consider hiking US interest rates by next year. Fed Funds futures are already pointing to a 60% chance of a rate hike in November 2022.
Overall, should officials further suggest this week that economic conditions are becoming more conducive for tapering, that could further strengthen the tailwinds for the US dollar.
Elevated dollar weighs down gold prices
A steady dollar this morning is offering gold prices a breather for the time being, with the latter recently forming a death cross and enduring a brutal drop by as much as 7.7% over the past week. Bullion bulls have been hurt by heightened expectations for the Fed’s eventual tapering, outweighing concerns surrounding the Delta variant’s potential impact on the global economic recovery.
However, should the greenback enjoy another leg higher, then a move back down to this week’s flash crash lows and the $1677 level that was last seen in March beckons. The rebound in Treasury yields is also set to run further as the tapering talk grows louder, which would only strengthen the headwinds besetting gold prices.
Demand-side uncertainties still weigh on oil outlook
Besides the US inflation print, oil is also likely to be sensitive to the EIA’s US inventories data due Wednesday as well as Thursday’s market reports out of OPEC and the IEA. Should the EIA data confirm an inventories drawdown that’s significantly smaller than the forecast of 750k , WTI futures may retest the 100-day simple moving average as a key support level.
Traders will be keen to find out how OPEC and the IEA factor in the downside risks stemming from the Delta variant’s impact on global demand. Markets have already become less bullish on oil’s trajectory with Asian refiners reportedly asking for smaller volumes for next month.
Ultimately, market participants will be closely monitoring the Delta variant’s impact on global economic conditions in ascertaining whether $70 oil is warranted for the near-term. As more major economies persist with virus-curbing measures that curtail economic activity, oil becomes more susceptible to further unwinding of its year-to-date gains.