A strong start for Europe ahead of key US data

Bourses across Europe have started the day in positive territory, taking the lead from a positive close in the US. An air of calm returned to trading in the US session, as volatility eased and investors focused their attention on today’s retail sales and inflation data from the US. 

These high impacting releases would normally catch the attention of traders anyway, however given recent market action US inflation figures and perhaps to a slightly lesser extent, US retail sales, will be the cornerstone of trading today. 

Let’s keep in mind, it was the strong acceleration of wages growth from the US jobs report which led investors to fear that inflation could pick up at a quicker pace and sooner than initially thought. This, in turn, would leave the Federal Reserve little option but to tighten monetary policy more aggressively. These fears were played out in the bond market as the yield of the US 10-year treasury climbed, hitting a 4-year high. Meanwhile stocks tumbled, and the dollar gained. 

CPI & Retail sales forecasts 

Headline US CPI is expected to show a slight dip to 1.9% year on year in January, down from 2.1% in December. Meanwhile core inflation, which strips out more volatile items such as food and fuel is expected to dip to 1.7% year on year in January, down from 1.8% in December. 

US retail sales, also released at 13:30 GMT (08:30EST) with CPI figures, are expected to have declined in January to 0.2% month on month, down from 0.4% in December Given the market’s concerns of higher inflation and faster interest rate hikes, a higher than expected CPI or retail sales reading would in fact feed these fears. 

In this case there is a chance that we could see another episode of last week; stock markets and bond markets falling, whilst higher yields would boost the dollar. 

What to watch 

Should the figures beat forecasts, the dollar could surge. USD/JPY which is currently down at 1077.50 could look to break through 108.00 on its way to 108.50. The Dow and the S&P would be expected to fall, with the Dow potentially eyeing support at 23780 prior to targeting its recent low of 23,360. 

If the data releases fall short of expectations, we would expect the USD/JPY to attack 107.30 before extending losses towards 106.8. Meanwhile the Dow & the S&P could experience a relief rally, with the Dow pushing for 25,300 below targeting 25700.