Caution Ahead of US Inflation Release, RBNZ May Be Done With Hikes

Stock markets are tentatively higher on Wednesday as traders adopt a cautious position ahead of the US inflation report.

Any hopes of another pause from the Fed this month have dwindled in recent weeks as the data simply hasn’t delivered what it needed to in order to convince the FOMC to do so for a second consecutive meeting. A second pause would be taken as a sign that the tightening cycle is over so it’s not a decision that would be taken lightly.

The jobs report on Friday was nowhere near good enough to convince the Fed that it has achieved its objectives. There will no doubt have been relief that the NFP number didn’t replicate that of the ADP but together with the wage component, it still pointed to a labour market that is very tight.

It would take something remarkable from the inflation report today to convince policymakers that they can afford to pause again. The headline CPI falling to 3.1% doesn’t fall into that category when the core number is expected to remain high at 5%. It would take a real shock on the core side to really stimulate the debate in two weeks.

RBNZ may be done with its tightening cycle

The RBNZ opted to pause its tightening cycle earlier today after a very aggressive tightening cycle over the last couple of years. After increasing the cash rate to 5.5%, there are signs that the economy is slowing which will bring inflation down. While inflation has only fallen to 6.7% so far, data next week is expected to show it falling further and the central bank is confident it will return to its 1-3% target range next year.

New Zealand faced many challenges in the aftermath of the pandemic which contributed to surging inflation but much higher rates and levels of immigration appear to be easing those pressures.

Could US CPI trigger a major breakout in gold?

Gold is edging higher again today but there is clearly an element of caution in the move. Perhaps traders are hopeful of a favourable CPI figure from the US but they’re clearly not that confident with the price remaining below $1,940 where it has repeatedly run into resistance.

A break above here today could be a bullish signal, although there remain many more obstacles ahead including $1,960, $1,980 and $2,000 before traders will feel confident that the yellow metal is back. A stronger inflation report could push it back towards $1,900 which has held as support until now, mostly. A break of this could be a very bearish development.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

 Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA