USD: All eyes on US CPI - Scotiabank

Markets are quiet and shrugging off the successful conclusion of US/ China talks, eyeing the outcome with a certain degree of skepticism. The negotiations have produced a framework for implementing the details of an agreement that had been previously agreed in May, Scotiabank's Chief FX Strategist Shaun Osborne notes.

USD quiet overall with considerable risk in 8:30am ET CPI release

"Currencies remain quiet for the most part, with MXN outperforming on shifting expectations for Banxico's outlook and its move toward a less dovish stance. Meanwhile, AUD and NZD are underperforming with modest declines, holding on to losses resulting from early Asian session headlines related to trade and news that the US Court of Appeals had ruled in favor of the US administration's tariffs. All of the remaining G10 currencies have recovered their trade headline-driven losses and are entering Wednesday's NA session relatively unchanged vs. the USD."

"The broader market's tone is also quiet, as US equity futures consolidate just below Tuesday's fresh local highs while the US 10Y appears to be finding modest support with a gentle recovery toward 4.50%. Oil prices remain well supported, climbing above $65/bbl and threatening an extension of their recovery from the April/May lows. Copper prices are weak, rolling over following signs of exhaustion (last Thursday's shooting star doji) and an impressive rally from early May. Finally, gold is offering little in terms of direction at the moment, extending its tight consolidation for a third consecutive session as it trades around the mid-point of the flat range that has defined its price action since it reached its record high in late April."

"The focus for Wednesday's NA session will center on the 8:30am ET release of US CPI with expectations of a modest increase in both headline and core. The broader narrative around inflation has been one of persistent underlying pressures, most importantly in core. This has forced a shift in tone at the BoC, ECB, and now Banxico and could generate a sizeable (bullish) USD reaction if the release were to surprise to the upside. The response could be short-lived however, as the 2pm ET release of the US Federal Budget Balance will likely sharpen the market's focus on the USD's longer-term issues. Fedspeak remains limited in the blackout period ahead of next week's meeting."