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What Inflation Means for USD, Gold and Stocks

July 13, 2023
Frank Cabibi

For the past two days, the market got insight on what the Fed may do with interest rates going forward. CPI and PPI news released at lower than expected across the board, and the market acted accordingly. So, what could this mean for assets like USD, Gold and the stock market?

EdgeFinder Analysis

The NAS100 looking especially stronger after yesterday's and today's inflationary news. the EdgeFinder takes into account where CPI is moving. After CPI, inflation fell back into a target range where the Fed is comfortable with. The closer CPI is to 2%, the more likely the Fed will be dovish.

Price broke to a higher high on the 1D timeframe suggesting that price could be a bit overstretched, however, sentiment has become clearly more bullish. Other than a -1 from GDP growth, things are looking optimistic from the EdgeFinder's perspective.

USDJPY on the other hand, is not looking so hot. With the combination of yen strength and dollar weakness in the latest CPI numbers, it's not looking bullish at all. Although price is up against what looks to be support, it's not clear whether or not it will respect this level.

On top of that, both the 10 and 2 year bond yields are falling suggesting further weakness for the dollar. It would seem possible for the pair to come down a bit further to test support before making another decision in price action. The support level sits around 137.8.

Gold looks increasingly better on the EdgeFinder as the score now sits at +4 buy. Despite infaltion and unemployment, the other factors are positive for the metal. Seasonality and trend readings agree that this pair has more upside from a technical perspective.

COT and retail are in a correct disagreement in the formula for a bullish gold bullion. Because the economy in the US is slowing down, and inflation is getting closer to its 2% target, investors are less concerned about future rate hikes.

Retail Spotlight

Retail sentiment will tell you everything you need to know about USD pairs. The crowd is in for a wild ride if they think there will be a long term reversal in USD pairs anytime soon. Meanwhile, gold and stock index traders are doing a good job of going the opposite way of the correct move.

Smart Money Spotlight

Here is a different look at the SPX500 on the Smart Money Tracker. As you can tell from these two charts, the number of long contracts is increasing over time, more so than the number of shorts. The bottom chart shows an overall net bearish reading from COT, but if you take a look at the yellow bars across time, SM is getting less bearish.

Fundamental Spotlight

The Fed's forecast shows another hike or two by year end. After recent inflation numbers, however, investors are not quite sure where rates will go from here. The Fed has been clear that they intend to continue to tighten if the data is there to prompt it. But core and regular CPI have been cooling. Investors now wonder if at all there will be another hike. And if so, maybe one more. Hard to say, but cooler inflation numbers across the board is bullish for the indices and gold.

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