What dollar impact can you expect from US CPI and is this crypto’s Lehman moment?

S&P 500, VVIX, Bitcoin, CPI, Dollar, EURUSD and USDJPY Talking Points:

• The market perspective: USDJPY Bearish Below 146; EURUSD Bullish Above 1.0000; Gold Bearish Below 1680
• As the US mid-year periods pass without a definitive outcome for markets and the economy, focus now shifts to the high-profile CPI release
• Trouble in the crypto market has escalated again after Binance backs out of FXT bailout – could a wider speculative fear grow out of this area of ​​the financial system?

S&P 500 Leads Risk Retreat as Midterms Pass, watch the feedback from the crypto markets

There was little relief from the market’s distraction through the start of this week. Where the decision of the US mid-term elections raised a future milestone that limited speculative interests, the more “binary” potential of the consumer price index (CPI) release on Thursday effectively picked up the baton to keep speculative conviction in check. Nevertheless, that event too will soon pass. Evaluating the sentiment flow leading up to the top US economic document list on Thursday, there was some notable – but nascent – ​​traction recorded from the S&P 500 through Wednesday’s session. The fall of -2.1 percent was the first fall from the US index in four trading sessions. There would also be headwinds in the form of an upswing in the VVIX ‘volatility of volatility’ index. A further erosion continued in the relationship between the once speculative favorite Nasdaq 100 (populated by the FAANG members) versus the stoic Dow Jones Industrial Average. The NDX-DJIA ratio fell to a new two-and-a-half-year low through Wednesday’s close.

Chart of the S&P 500 with volume overlaid with the VVIX index and 1-day ROC (daily)

Diagram Created it Tradingview platform

While the dominant fundamental focus around “risk assets” in recent weeks and months has reasonably focused on the consequences of the impact of monetary policy as well as the likelihood of recession moving forward, it is important to keep a cautious eye open for the unexpected sparks that could ignite unforeseen economic fires. Just such an embryonic threat seems to be bubbling up through the crypto market. News earlier this week that cryptocurrency exchange FTX was struggling under heavy customer withdrawals appeared to find balance when it was reported that Binance stepped in to essentially rescue the struggling company. However, that reassurance fell apart this past session after Binance withdrew its takeover offer. The implications are not good. This adverse turn begs the question: how systemically important is FTX to the cryptocurrency. It is a major player, but the real threat is the potential for contamination in space. Should stress tests on other critical players in the asset class create critical pressure, technical placement will have little significance. In terms of what this means for the wider financial system, it means little that this happens in the crypto space if it triggers a general panic in speculative appetite in general. I don’t operate expecting gray swans, but it would be foolish to ignore the flare-ups that seem like they could easily escalate.

Chart of BTCUSD with 1-Day Rate of Change (Daily)

Diagram Created it Tradingview platform

US CPI and the dollar’s exposure to interest rate implications

With the passing of Wednesday’s session, we have further spaced out the market’s speculative focus and the US mid-term elections. That doesn’t mean the US political landscape is clear — in fact, the outlook for Congress appears to hinge on some key recounts and possible runoffs. But because of its overall speculative influence, I think the short-term potential for this event has come and gone (the long-term impact will likely play out for a while, but at a more glacial pace). Still, with the election distraction easing, we see the focus on the speculative rating shift to yet another scheduled event in the immediate future: the October US CPI. The economist’s forecasts call for a very modest moderation of the inflation cut. This series of indicators has serious weight given that last week the FOMC made its plans to extend the timeline and top rate for its hawkish regime ambiguous after last week’s 75 basis point rate hike. This influence can turn the event into a meaningful market move regardless of whether the actual reading beats or misses expectations.

Critical macro event risks on the global economic calendar for next week

Calendar Created by John Kicklighter

As for the market’s response to the inflation report, the impact is likely to be broad across the financial system; but the dollar is perhaps my main focus. Below is the DXY Dollar Index chart that each of the last 8 months CPI releases highlighted. The direction the market takes after the inflation update depends significantly on the direction and intensity of the data surprise. That said, the market’s response to the updates has tended to skew towards significance. Given the extended series of significant rate hikes and the Federal Reserve’s warnings that it will act mainly to control price pressures, the potential for significant volatility around this event remains very high.

US Dollar Chart with CPI, 100-Day SMA and 1-Day ROC Release Dates (Daily)

Diagram Created it Tradingview platform

EURUSD and USDJPY: Different potential, inflation should touch the market response

When it comes to assessing whether inflation statistics will beat, meet or miss expectations; I don’t presume to have any meaningful insight into how the data will be printed. As such, my approach is to find alternatives for the various outcomes. In the event that the CPI reading meets expectations, the headline (8.0 percent) and core (6.4 percent) pace will remain extremely high and likely default to an important assessment of a hawkish reading. It would be a negative catalyst for “risk” and benefactor for the dollar. It is fairly easy to assess an S&P 500 or Dow bearish course, but assessing a strong Greenback receiver is another matter, as the currency is not far from its multi-decade highs set last month. One candidate that seems well positioned is the EURUSD, but not for the revival of its overall bearish trend. Rather, a swing above the last 8-week range would seem possible.

Chart of EURUSD (daily)

Diagram Created it Tradingview platform

For the US inflation report to really disappoint, the decline in the CPI would likely have to be significant. Something on the order of a 7.0 percent headline clip could certainly achieve that designation — though that’s a more extreme scenario. Such a downgrading of inflationary pressures could give the Fed the opportunity to lighten the fight against inflation and shift attention back to a throttling of economic conditions. Yet, for the US dollar, the implications may be a bit more immediate and dramatic. Among crosses that would be more prone to a dramatic and intense reaction to a dollar retreat, I consider USDJPY the most susceptible to action. There is a risk sensitivity to this pair, but the macro fundamental sensitivity is mainly a reflection of the dollar’s fortunes. Therefore, a severe Greenback collapse would be particularly burdensome here.

Chart of USDJPY with 50 and 100-day SMAs with 20-day ATR and historical range (daily)

Diagram Created it Tradingview platform