Investors Cautious as Dow Gains Modestly Ahead of Crucial US Inflation Report | Daily Market Analysis

Key events:

• USA - Core CPI (MoM) (Feb)
• USA - USD CPI (YoY) (Feb)
• USA - CPI (MoM) (Feb)
• USA - 10-Year Note Auction

On Monday, the Dow Jones Industrial Average experienced a modest gain as investors anticipated forthcoming inflation data, a crucial factor influencing the Federal Reserve's stance on interest rates.

The Dow rose by 46 points or 0.1%, while the S&P 500 declined by 0.1%, and the NASDAQ Composite slipped by 0.4%.

Investors are closely watching the CPI data scheduled for release on Tuesday, seeking insights into the trajectory of US interest rates and the overall economic landscape. While expectations suggest a moderation in inflation after two consecutive months of elevated CPI readings, the annual core figure is still anticipated to surpass the Fed's annual 2% target.

Following a robust employment report, some market participants have revised their expectations, now leaning toward a rate cut in June rather than May. UBS noted in a recent statement, "We now expect the first rate cut to come at the June FOMC meeting. Chair Powell's testimony this week was fairly balanced, however, and seemed consistent with a Chair retaining that option."

Federal Reserve Chair Jerome Powell, along with other central bank officials, emphasized last week that they require additional evidence of weakening inflation before considering any interest rate adjustments.

The USD/CHF pair traded within a narrow range above the mid-0.8700s in the early European session on Tuesday. Investors exhibited caution, awaiting the pivotal US inflation report later in the day. The Swiss Franc garnered some support due to the prevailing cautious market sentiment.

Last week, Federal Reserve officials reiterated their data-dependent approach, expressing the need for confidence in sustained inflation returning to the Fed's 2% target. Money markets have assigned a 70% probability of a rate cut in June, while the likelihood of a May rate cut stands at 22%, according to the CME FedWatch Tool.

The forecast indicates the headline CPI figure is expected to remain stable at 3.1% YoY in February, while the Core CPI figure is projected to decrease to 3.7% YoY from January's 3.9%. This data has the potential to induce market volatility, with a stronger-than-expected report potentially dampening expectations of a Fed rate cut, providing a tailwind for the US Dollar and USD/CHF. Conversely, escalating geopolitical tensions in the Middle East might bolster safe-haven assets like the Swiss Franc, limiting the pair's upside. Concerns are rising about the spread of violence, particularly in Jerusalem, during the Islamic holy month of Ramadan, as a ceasefire remains elusive according to the BBC.

The Australian Dollar is exhibiting sideways movement with a potential to recover losses against the stable US Dollar. However, the AUD/USD pair faces challenges as investors adopt a cautious stance before a critical US inflation report, which could influence the Federal Reserve's monetary policy outlook.

Australia's S&P/ASX 200 Index showed improvement, driven by gains in financial and gold stocks on Tuesday, potentially providing support to the Aussie Dollar. Assistant Governor Sarah Hunter at the Reserve Bank of Australia addressed a panel at the AFR Business Summit, discussing fourth-quarter GDP in line with forecasts. Hunter noted that recent inflation data met expectations, with inflation remaining a primary hindrance to household consumption.

The Japanese Yen experienced significant selling pressure during the Asian session on Tuesday, reversing some of its recent strong gains to levels not seen since early February. Japan's Finance Minister Shunichi Suzuki's comments suggested that it's not the time for the Bank of Japan to tighten monetary policy. BoJ Governor Kazuo Ueda acknowledged weaknesses in incoming macro data, contributing to a negative outlook for the JPY. Investors, however, anticipate another substantial pay hike in Japan, fostering consumer spending and demand-driven inflation, potentially allowing the BoJ to shift away from its ultra-loose policy setting in the upcoming meeting on March 18-19.

The GBP/USD pair remains defensively positioned above the 1.2800 support during early Asian trading on Tuesday. Lower expectations of rate cuts from the Bank of England are weighing on the Pound Sterling. Investors are awaiting UK labor market data and US CPI inflation data for potential market impact.

BoE policymaker Catherine Mann mentioned on Monday that the UK has a long way to go for inflation pressures to align with the central bank's 2% target. UBS Global Research anticipates the BoE to initiate interest rate cuts, with a 25 basis point (bps) cut expected in August, a shift from the earlier expectation of a cut in May.

The cautious market sentiment ahead of significant events in both the UK and the US might provide support to safe-haven assets like the US Dollar. Investors are particularly focused on the forthcoming US consumer inflation figures, refraining from aggressive directional bets in anticipation of these key developments.

Market attention will also turn to Thursday's retail sales data for February, anticipated to rebound by 0.8% after a similar decline in the preceding month. The economic calendar further includes updates on industrial production, consumer sentiment, and weekly data on initial jobless claims.