As Good a US Inflation Report as We Could Have Realistically Hoped For

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

Financial markets are buzzing at the US open on Wednesday, with investors buoyed by a very promising inflation report from the US.

The report not only beat at the headline level but core actually slipped even further, dropping to 4.8% for the first time since October 2021. The monthly data was also extremely encouraging, with headline and core falling to 0.2% which was lower than the consensus forecast in both cases. It really is just what the doctor ordered.

Of course, there’s been plenty of setbacks over the last couple of years so we don’t want to get too carried away with one inflation report but it really is about as good as we could have realistically hoped for.

That said, it’s unlikely to change the outcome of the debate that takes place in two weeks. The Fed is still extremely likely to hike by 25 basis points, rightly or wrongly, as the labor market data on Friday simply wasn’t good enough. In fact, the wages component was quite the opposite and will likely convince the FOMC that one more hike is warranted, which is what markets are still heavily pricing in.

But that may well now be the last and if we can see any further signs of progress over the summer then that will likely end the debate altogether, shifting the conversation from how many more hikes to the timing of the first cut.

Brent crude trying to break $80 after US inflation report

Oil prices have been understandably lifted by the release which makes sense. Anything that could enable a soft landing in the US is good for oil prices. Brent was already trending higher though and is now at its highest point since April, having already broken out of the range it traded within for the last couple of months. ​

The next level for Brent to overcome is $80, which would be a big psychological leap. That may also see WTI break above its June high following the spike on the 5th. The move higher also suggests the latest efforts of Saudi Arabia and Russia are working in tightening the markets and boosting prices after multiple failed efforts.

Gold gets a welcome boost but can it be sustained?

The US inflation data gave gold just the boost it needed to break back above $1,940 after failing to pierce that level in recent days. The yellow metal has been range-bound in recent weeks between $1,900 and $1,940 and today’s report did what the jobs data failed to do; it provided the catalyst for a breakout.

There remains plenty of resistance ahead for gold and today’s move doesn’t necessarily suggest the correction we’ve seen since May is over but it’s a massive step in the right direction. If the inflation data continues to improve then that could be bullish for gold. The next tests for gold are $1,940, $1,960 and $2,000, which roughly represent the 38.2%, 50% and 61.8% Fibonacci retracement levels from the May high to the June lows.

Is lower inflation good for crypto?

There’s been a lot of volatility in bitcoin in the aftermath of the US inflation release but in terms of sustained direction, not much appears to have changed. At the time of writing, it’s basically trading back where it started, although the price remains extremely choppy so that may not be the case an hour from now, let alone by the end of the day. Traders, as it stands, seemingly can’t make up their mind if it’s good or bad for crypto.