European Open: FX trader are pricing “ the writing on the wall” trade

While Asia stocks are trading higher on the path of least resistance thanks to the China reopening, US futures are mostly treading water today but maintaining overnight gains as we move through a valley between peaks of new information.

 After ringing in the new year with the most peculiar data combination of a resilient labour market set against eroding business confidence, US futures are idling as we await the next round of macro and micro data inputs. With CPI dead square on the radar.

European markets should catch an updraft from Asia stocks. At the same time, a tempering in US inflation expectations. should boost the Euro’s appeal attracting more inflows as international investors grow increasingly more confident in the Euro’s direction as the US dollar’s safe-haven appeal erodes.

FX and the gold markets continue to price in the “writing on the wall” trade. With automotive fuel prices down by over 12% in December, headline inflation will drop; hence the Fed should be less aggressive, supporting a potential re-steepening in the US yield curve and a clear signal to sell the US Dollar. And then all ships should rise.

The question is really by how much CPI falls below consensus. Although many economists’ lucky black balls have been well off the mark with their inflation projections, I suspect this is one of the easier prints to forecast, so the delta may not be that extreme, hence the market reaction won’t be too violent Note the market reacts to the difference between data expectations vs data actualizations.