All eyes on US CPI ahead: Nasdaq 100, USD/JPY, EUR/USD

Market Recap

The lead-up to the US Consumer Price Index (CPI) release later today set the stage for some cautious trading overnight, with major US indices ending the day mixed on lower-than-usual volume. The outperformance in value sectors (energy +0.89%, financials +0.85%) compared to growth sectors (communication services -0.42%, technology -1.03%) overnight seems to reflect some positioning for upside risks to inflation, with the trend that value stocks tend to be preferred during inflationary periods. The VIX has also seen a last-hour surge on increased hedging activities.

Current expectations are for US headline CPI reading to moderate sharply to 5.2% year-on-year (YoY) from previous 6%, but with higher oil prices setting the stage for some inflationary pressures ahead, more attention could revolve around the core inflation aspects. Month-on-month, core CPI is expected to head lower to 0.4% from previous 0.5%, but year-on-year expectations are for a tick higher to 5.6% from previous 5.5%, overall forming a mixed bag. Any higher-than-expected inflation print could lay the ground for another 25 basis-point rate hike in June from the Federal Reserve (Fed), with the hawkish recalibration in rate expectations likely to support higher US dollar and weaker equities (growth).

The higher highs/higher lows narrative remains intact for the Nasdaq 100 but the index is hovering at a key Fibonacci confluence zone, which will serve as immediate resistance to overcome. A bearish divergence on moving average convergence/divergence (MACD) suggests abating upward momentum, with sentiments on hold for further cues on the fight against inflation. Any retracement may still leave the formation of a higher low on watch. On the upside, any successful move above the Fibonacci confluence zone may pave the way for a retest of its August 2022 high.

Asia Open

Asian stocks look set for a slight positive open, with Nikkei +0.33%, ASX +0.53% and KOSPI +0.34% at the time of writing (8.30am SGT). Lower-for-longer growth outlook seems to be the takeaway from the International Monetary Fund (IMF) yesterday. Its global economic growth forecasts for this and next year have been revised lower by 0.1%, with the forecasts based on the assumption that the recent financial sector stresses are contained. Further knock-on impact will likely surface over the coming months, with tighter lending standards potentially reflected in weaker consumer spending and lower firms’ investments.

Japan’s March producer price index (PPI) came in slightly higher than expected at 7.2% this morning, but the sharp moderation from previous 8.2% could help in limiting the cost pass-through to consumers. Nevertheless, a shift in the Bank of Japan (BoJ) policy remains a question of not if but when, although we have seen a pushback in expected timeline from July this year to potentially only in 2024.

The USD/JPY (大口） is attempting to push above its current consolidation range, with higher lows on MACD reflecting building upward momentum. Much will revolve around the US CPI data to provide the go-ahead for further upside. However, a series of resistance ahead may likely push back against a renewed bull trend for the pair, particularly at the 138.00 level. This is where a 38.2% Fibonacci retracement level stands in coincidence with its key 200-day moving average (MA).

On the watchlist: EUR/USD nears February high ahead of US CPI release

After a brief consolidation last month, the bulls have retained control of the EUR/USD, with the pair heading near its February high at the 1.100-1.103 level. While broad expectations are for the Fed to deliver one last 25 basis-point rate hike in May, the European Central Bank (ECB) is expected to keep hiking. Market pricing is for three more 25 basis-point moves over the next three meetings from the ECB, with the potential diverging policy path supportive of EUR/USD’s upside. That said, much will surely hinge on the US CPI data later to convince market participants that a Fed hike in June will not be needed.

For now, the 1.100-1.103 level will be a strong resistance to overcome, which marked a bearish shooting star candle on the weekly chart. Overcoming this level could be on watch to support further upside to the 1.128 level. On the other hand, failure to cross the level could bring several support lines in sight, which include an upward trendline and a Fibonacci level at 1.061.

Tuesday: DJIA +0.29%; S&P 500 -0.00%; Nasdaq -0.43%, DAX +0.37%, FTSE +0.57%