US CPI preview: Fed rate expectations dive, USD/CAD tests 1.37

Key takeaways

The upcoming US CPI report could tip the scales for the Fed’s highly-anticipated interest rate decision next week.
The report comes as traders sift through the confusion and uncertainty following the collapse of Silicon Valley Bank and fears of contagion in the banking sector.
Rate expectations could still change dramatically if the CPI report misses expectations of a 6.0% y/y increase.

When will US CPI be released?

The US Bureau of Labor Statistics will release the consumer price index (CPI) for February on Tuesday, March 14 at 8:30 ET.

What are the expectations for the US CPI report?

Traders and economists are expecting the report to show headline consumer prices rose 6.0% year-over-year, down from 6.4% last month. Core (ex-food and -energy) CPI is expected to come in at 5.5% y/y, down slightly from 5.6% last month.

US CPI preview

Traders are on tenterhooks over the upcoming inflation report, which will test an already worried market with concerns over the Federal Reserve hawkishness and the potential fallout from the largest bank failure since the financial crisis.

What was expected to be one of the biggest CPI reports in recent memory has been upstaged to an extent by the weekend’s volatility, but Tuesday’s update on consumer prices should still nonetheless be a major market mover.

Put simply, the decline from 9% to 6% inflation was always going to be the “easy part” for policymakers; the big question moving forward is if the Fed can engineer a continued decline in price pressures without “breaking” any other aspects of the economy.

Despite aggressive action over the weekend, the collapse of Silicon Valley Bank has led to confusion and uncertainty in the market, with concerns that it could lead to contagion among other regional banks (see my colleague Josh Warner’s explainer of the situation here). In essence, the market is nervous that the Fed's campaign to fight inflation by ending the era of cheap money has exposed cracks in the economy that could widen if it keeps up its rate hikes.

In the wake of the implosion of SVB, traders are dialing down their expectations for Fed hawkishness next week, with a 25bps interest rate hike 70% discounted and a 30% implied probability of no rate hike whatsoever, according to CME's Fedwatch tool.

Source: CME FedWatch

Canadian dollar technical analysis – USD/CAD pulling back to 1.37

The US dollar is the weakest major currency on the day, but it is bouncing off its intraday lows as we go to press. One pair to watch closely around the US CPI report and beyond will be USD/CAD.

After breaking convincing out above previous resistance at 1.3700 last week, the North American pair is pulling back to retest that level today. As many traders know, once a resistance level (price “ceiling”) is broken, it can provide support (a “floor” under price) when the market pulls back to it.

If the 1.3700 level does bounce off 1.3700, bulls may start to look for a resumption of last week’s upside momentum, with room to retest last week’s highs near 1.3850 or even test the psychologically-significant 1.40 level in time.

Source: StoneX, TradingView

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter @MWellerFX

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.