First Light News: All Eyes Are On the US CPI Data Today

US stocks eased back on Monday, with the S&P 500 falling 0.3% to 6,373, the Nasdaq 100 dropping 0.4% to 23,526, and the Dow Jones Industrial Average declining 0.5% to 43,975. This follows US President Donald Trump signing an executive order extending the trade truce with China by another 90 days, effectively placing matters on the back burner until 10 November and allowing the two nations time to negotiate a trade agreement.

However, tensions persist as China urges firms to avoid using Nvidia’s H20 chips, according to Bloomberg. This follows reports that the People’s Republic is concerned about national security risks linked to these chips. At this point, it remains difficult to understand exactly why the government has advised against using these chips.

Overall, market action is somewhat calm ahead of today’s US CPI inflation report (Consumer Price Index).

July US CPI Inflation Report Eyed

The July US CPI inflation data will be out at 12:30 pm GMT. Expectations heading into the event are for both headline and core YY measures to show a mild uptick to 2.8% (up from 2.7%) and 3.0% (up from 2.9%).

From a trader’s perspective, I feel the trade that could offer more bang for your buck here would be a downside surprise in the data – this would defy expectations and suggest that the pass-through of tariffs to consumers is limited right now. If inflation is not standing in the Fed’s way after the July jobs data revisions, investors will likely price in more rate cuts. The Fed has been clear that tariff uncertainty is its main concern about cutting rates; remove that concern, and it could move more aggressively. Consequently, this would likely trigger a move lower in the US dollar (USD) and US Treasury yields, and provide a bid for Stocks and Spot Gold (XAU/USD).

However, if we see an upside surprise in the data today, this could still present a trading opportunity for USD upside, though I believe traders will approach this with less ‘size’ and the move could be more short-lived. We have to remember that the US July payrolls number showed the economy added 35,000 new jobs based on a three-month average, marking a considerable slowdown. The Fed is working with a dual mandate – price stability and maximum employment – and I do not see the central bank allowing the jobs market to deteriorate due to tariff-driven inflation. Hence, any USD upside from better-than-expected CPI data is likely to offer a scalping opportunity, rather than a swing trade.

RBA Cuts Rates to 3.60%

Overnight, the Reserve Bank of Australia (RBA) reduced the cash rate by 25 basis points (bps) to 3.60%, as widely expected. This marks the third rate cut since the beginning of the year and follows July’s surprise hold decision.

Although the market was widely expecting this move, a hold decision again today – given the Australian dollar (AUD) is one of the most oversold currencies in the G10 space right now – could have provided enough fuel for a sizeable AUD long. It was not to be. Overall, the ASX 200 stocks remained at all-time highs, and the AUD/NZD (Australian dollar versus the New Zealand dollar) responded by whipsawing north of a major resistance on the daily scale at NZ$1.0973.

UK Jobs Data Not as Bad as Expected

Earlier this morning, the June UK jobs report landed and was not as bad as feared. As forecast, unemployment remained unchanged at 4.7% in the three months to June, with July HMRC payrolls change showing the UK economy losing fewer jobs than expected, dropping 8,000, a sixth consecutive monthly drop. In terms of wages, pay that includes bonuses eased to 4.6%, down from May’s reading of 5.0% (consensus: 4.7%), while pay excluding bonuses came in line with estimates and previous data at 5.0%. This followed the hawkish 5-4 MPC vote (Monetary Policy Committee), albeit after a vote recast which saw Alan Taylor vote for a heftier 50 bp rate cut. The British pound (GBP) is mixed versus G10 currencies as of writing.

This is not an ideal picture for the Bank of England (BoE), but it is not the worst. The central bank continues to face sticky inflation and softening jobs data, but ultimately, I feel the BoE will continue to emphasise inflation over jobs. The persistence of elevated pay growth suggests that labour market weakness, while real, has not reached the threshold needed to override inflation concerns.

Written by FP Markets Chief Market Analyst Aaron Hill