US CPI Watch: What markets stand to lose and win on this week’s inflation report?

The markets will heat up this week as the US CPI report is due on Wednesday, May 15 at 12:30 GMT.
 

• Expected US annual CPI: 3.4% from 3.5%
• Expected US annual Core CPI: 3.7% from 3.8%

All 51 of the estimates provided by large banks and analysts, except 3, suggest that core inflation could gain by 0.4% month over month. The strong herding around this number exemplifies the importance of this number: individual economists do not want to be caught wrong and prefer sticking with the consensus estimate. And the reason is simple, an outcome that is materially different to the expected figure is expected to alter the expected rate path of the Federal Reserve.

Per the CME FedWatch tool, the probability of a rate cut at the September 18 meeting stood at 62.7% on May 13, but a lower-than-expected inflation reading could boost this to 100%, while a higher-than-expected reading could delay the rate cut until early 2025.
 

Nasdaq 100 (NAS100) could drop sharply on a hot CPI reading.

One of the more sensitive markets on a hotter-than-expected inflation reading is the Nasdaq 100 (NAS100). The index bottomed from the 17,299 level and gained 5.54% over the last 11 days. The index is now just 1.7% from its all-time high, and we have not had any correction, making the index prone to corrections or, if the CPI reading is hot, for an outright trend reversal.

Short-term levels to watch is the May 6 low of 17,892, a slide below this level, is likely to send buyers packing, and exposes the May 3 low of 17,625, followed by the May 2 low of 1,7284. The next resistance level is 18353, followed by 18489.

AUD/USD could trigger a major bullish pattern on mild CPI reading 

The Australian dollar could emerge as the big winner following a soft US CPI reading.  

The currency has been in an inverse head-and-shoulders pattern for approximately 81 days. A break to the May 3rd high of 0.6650 would trigger the neckline of this pattern, suggesting a potential lift of as much as 254 pips, reaching approximately 0.69.  

Additionally, the Australian dollar is supported by a hawkish stance from the Australian central bank.  

Australia's annual GDP growth rate is 1.5%, and its inflation rate is 3.6%. However, at its last rate meeting, the central bank indicated that the employment rate was too low to lead to lower inflation. Instead, the central bank anticipates that inflation will not return to its target by the middle of next year. This implies speculation that the Australian central bank might need to increase interest rates at some point, although that does not seem likely. The combination of a hawkish central bank and this technical chart pattern makes the AUD/USD pair one of the more interesting, if not the most interesting, markets if US inflation this week is softer than expected.  



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