Markets Await Key CPI Data and ECB Rate Decision Amid Currency Shifts | Daily Market Analysis

Key events:

• UK - GDP (MoM) (Jul)
• USA -Core CPI (MoM) (Aug)
• USA -CPI (MoM) (Aug)  
• USA -CPI (YoY) (Aug)
• USA -Crude Oil Inventories

During Tuesday's evening trading, US stock futures were locked in a narrow range, reflecting a mixed session for major benchmarks as investors prepared for the release of fresh consumer price index (CPI) data scheduled for Wednesday's session.

Dow Jones, S&P 500, and Nasdaq 100 were each trading within a 0.1% range.

The US dollar exhibited overall stability ahead of a crucial US inflation report anticipated on Wednesday. However, it gained ground against the yen as traders continued to digest remarks made by Japan's top central banker regarding a possible early exit from its negative interest rate policy.

The US currency strengthened by approximately 0.2% to reach 147.39 against the yen. This move marked a firm retracement of its most substantial one-day percentage increase in two months, which occurred on Monday following statements from Bank of Japan (BOJ) Governor Kazuo Ueda over the weekend.

Investors had more time to carefully assess Ueda's comments, and influential ruling party lawmaker Hiroshige Seko signaled his preference for maintaining an ultra-loose monetary policy on Tuesday, reacting to Ueda's remarks, which had driven up the yen and bond yields.

The yen has faced persistent pressure against the dollar, particularly since the BOJ maintains a dovish stance compared to global central banks, especially following the Federal Reserve's aggressive rate-hike cycle that commenced in March 2022.

Data released earlier on Wednesday indicated that Japan's annual wholesale inflation had decelerated for an eighth consecutive month in August, though it remained at 3.2%, exceeding the central bank's 2% target.

On a broader scale, the US dollar retained its strength, although market movements were subdued as traders awaited a closely monitored US inflation reading scheduled for later on Wednesday.

Sterling experienced a 0.05% decline to $1.2489, while the Australian dollar saw a 0.03% drop to $0.6408.

The US dollar index, which gauges the dollar's performance against a basket of rival currencies, remained steady at 104.61, following a one-week low on Monday and its most significant daily decline in two months. Analysts attributed this decline to the unwinding of long dollar positions after a recent string of robust US economic data.

Wednesday's US consumer price index (CPI) data for August comes just a week before Federal Reserve officials convene to decide on interest rate policy. The headline CPI is anticipated to rise by 0.6%, compared to 0.2% in the previous month, and by 3.6% annually.

While the central bank is widely expected to maintain interest rates at the upcoming meeting, as indicated by CME's FedWatch Tool, the Fed's next steps in November remain less certain.

In other developments, the euro remained unchanged at $1.0753, having reached a one-week high of $1.0777 in the preceding session.

European shares faced a downturn on Tuesday, primarily due to the negative influence of German software company SAP, which was impacted by a disappointing forecast from US tech giant Oracle (NYSE: ORCL).

Germany's DAX index experienced a 0.5% decline, with SAP's shares sliding by 1.8%. This decline came after Oracle, its US counterpart, projected current-quarter revenue figures that fell below Wall Street's expectations. The challenging economic conditions had put pressure on cloud spending by businesses, contributing to the subdued outlook.

In contrast, Britain's FTSE 100 index was a notable exception, registering a 0.4% gain. This upward movement was supported by a weaker pound following the release of data indicating a weakening labor market. Interestingly, despite the economic challenges, wage growth remained robust in July, creating a somewhat ambiguous outlook ahead of the Bank of England's impending interest rate decision next week.

Money market traders gradually increased their expectations of another interest rate hike by the European Central Bank (ECB) in anticipation of the central bank's forthcoming monetary policy decision scheduled for Thursday.

Traders have now priced in a 50% likelihood that the ECB will implement a 25 basis point interest rate hike, raising rates to 4%, as part of their Thursday decision.