At 8:30 am ET this morning, the United States Bureau of Labor Statistics released a new set of shocking Consumer Price Index (CPI; a proxy for inflation) data. Month-over-month CPI and Core CPI (which excludes volatile food and energy prices) both rose far more sharply than expected in September. Month-over-month inflation had been forecast to rise at 0.2%; instead, it jumped by twice that at 0.4%, equating to 8.2% year-over-year. Likewise, core inflation was anticipated to hit 0.4% month-over-month, instead rising by a staggering 0.6%. Though today’s market activity did not reflect as such, this is incredibly bullish news for USD, as it further validates the Federal Reserve’s hawkish agenda, paving the way for more rate hikes. Let’s discuss what today's CPI news means, and several potential options for trading it.
Second Wind for Stocks?
The Dow Jones Industrial Average soared over 800 points today, or nearly 3%, on the inflation news. There is a chance this could be a bit of a reflexive fluke on the part of institutional traders (due to annual inflation technically decreasing from 8.3%), because current market conditions in the US remain holistically bearish for equities as the Fed slows economic output. However, there is also a possibility that the CPI news made stock traders more optimistic in the short term; after all, the Fed’s continued rate hikes were already all but certain, but consumer spending has evidently remained resilient despite monetary tightening. Thus, it could be the case that we see a stock market rally on a stronger-than-expected economy, however brief it may be.
Even More USD Strength
Similar to a jump scare in a horror movie revealing that the monster isn’t truly dead at the end, high inflation has once again reared its ugly head. The Federal Reserve will almost certainly feel ever more emboldened in their efforts to slow the economy, perhaps now further into the future as well, since Fed Chair Powell has made it clear he wants to err on the side of caution due to lagging indicators. Because USD has primarily surged in value in conjunction with the Fed’s interest rate aggression, it seems likely that demand for the US Dollar will yet again continue en masse.
Four Pairs to Trade
Here are four of the best forex pairs to keep an eye on for USD bulls, according to the EdgeFinder, A1 Trading’s handy market scanner. They are listed below with their respective ratings, signals/biases, and corresponding charts. The US Dollar's strange drop in value today may make for some optimal points of entry for those planning to go long on USD.
1) EUR/USD (Earns a -6, or ‘Strong Sell’ Signal)
2) XAU/USD (Earns a -6, or ‘Strong Sell’ Signal)
3) GBP/USD (Earns a -5, or ‘Sell’ Signal)
4) USD/JPY (Earns a 4, or ‘Buy’ Signal)
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