The CPI importance is fading

Read full post at forexlive.com

Michael
Brown,
Senior
Research
Strategist
at
Pepperstone,

shared
on
X
an
interesting
finding
today.
“The
EUR
overnight
implied
volatility
sits
at
8.8%
into
CPI
later
on,
implying
a
move
of
+/-40
pips
over
the
tenor.
That’s
the
lowest
level
o/n
implieds
have
traded
on
‘CPI
Day’
since
back
in
2021”.

This
is
just
another
evidence
showing
us
that
the
importance
of
inflation
data
is
starting
to
fade
and
the
market’s
focus
has
shifted
towards
growth
and
the
labour
market.
There
are
two
main
reasons
for
such
development:

Central
Bank
Focus

The
first
one
is
that
the
Fed
has
been
mentioning
countless
times
that
they
are
very
focused
on
the
labour
market
and
that
an
unexpected
deterioration
will
call
for
a
rate
cut.
In
fact,
the
only
path
for
interest
rates
at
the
moment
is
downwards.
If
inflation
stays
high,
the
Fed
will
just
keep
rates
steady,
but
if
it
continues
to
ease,
the
Fed
will
cut.

Business
Cycle

The
second
reason
is
tied
to
the
business
cycle.
In
different
parts
of
the
cycle,
we
can
see
the
market
focusing
on
different
things.
For
example,
coming
out
of
a
recession,
nobody
cares
about
inflation
because
there’s
very
little
pressure
on
it
given
that
the
economy
is
recovering
and
there’s
lots
of
unutilised
resources
in
the
economy.

On
the
other
hand,
when
we
are
well
into
an
expansion,
inflation
starts
to
become
the
main
focus
as
the
market
expects
the
central
bank
to
tighten
policy
to
slow
down
the
economy
and
bring
it
back
in
balance.
If
the
central
bank
keeps
conditions
tight
for
too
long
or
it
overtightens,
then
the
economy
could
slip
into
a
recession.

Right
now,
we
are
in
a
“slowing
but
growing”
phase
and
the
Fed
will
need
to
time
lots
of
things
correctly
to
achieve
the
soft
landing.
If
it
fails
to
do
it,
the
next
thing
we
will
be
talking
about
is
a
hard
landing.