US inflation data will be released today at 4:30 PM (GMT+4), and the markets are anticipating how the real reading will be compared to the expected reading and the previous reading. Expectations indicate that inflation on an annual basis will decline by around 4.1%, compared to the previous reading of 4.9%, which is considered the lowest reading since April 2021. In Figure 1 below, we notice how inflation began to decline at a significant pace during the previous three months.
Figure 1: US inflation data, US Department of Labor
This reading is considered one of the most important readings for markets, given that it precedes the Federal Reserve meeting by only one day, in which the next course of interest rates will be determined. The Fed has often mentioned that it will be more flexible according to the nature of the economic data. Markets expect the Fed to keep interest rates at 5.25% after 10 previous consecutive hikes but still stress the need for inflation to return to its target level of 2%.
Consequently, the markets will focus on whether the inflation reading will show optimism, justifying a pause in interest rate hikes, or if it will be a justification to continue tightening monetary policy. In general, analysts expect that the issuance of this data will be accompanied by fluctuations in the financial markets, with a reminder that the initial market reaction, regardless of the nature of the real reading, may be sharp and volatile at its beginning before the market begins to return to stability.
Therefore, it must be noted that traders have different ideas and convictions in the way they interpret the information issued, and therefore prices cannot move 100% according to that information. The expected scenarios are as follows:
- The first scenario: a reading higher than the previous reading (4.9%): means that there are fears of a rise in inflation again, and this will push the Fed to continue at a strict pace with regard to interest rates, and thus this may be positive for the US dollar and negative for stock indices and gold.
- The second scenario: a reading at or below the expected (4.1%): Perhaps this will be a sufficient and convincing reason for the Fed to halt the pace of raising interest rates, and thus it may be negative for the dollar and positive for stock and gold indices.
- The third scenario: a reading between the expected (4.1%) and the previous reading (4.9%): Here we will go to the probabilities of the first scenario whenever the reading is closer to 4.1%, while the second scenario may be the closest as the reading is closer to 4.9%.
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