US DOLLAR, US CPI DATA, FED RATE CUT BETS – TALKING POINTS

US Dollar may rise if CPI data beats estimates and cools rate cut bets

Euro may fall vs USD if German ZEW Survey report spooks markets

Italian political risk could once again spook regional equities, Euro

Learn how to use political-risk analysis in your trading strategy!

The US Dollar may rise vs the Euro if year-on-year US CPI data beats the 1.7 percent forecast and cools Fed rate cut expectations. German ZEW Survey data may also stir additional volatility if the report undershoots (what are already-low) forecasts and spooks markets. Traders may then place a premium on liquidity over yields and would redirect capital into open arms of the US Dollar.

US CPI DATA

Overnight index swaps are currently pricing in a 31 percent probability of a 50-basis point cut by the Fed, up from about 22 percent August 9. A soft CPI reading may push this number into the 40 percent range, though market expectations may be more dovish than what the central bank has conveyed. Investors were showered with this cold reality at the most recent policy meeting.

Fed Chairman Jerome Powell said the rate cut was not necessarily the start of an easing cycle but rather an insurance policy against future uncertainty. The result was a stronger US Dollar and weaker S&P 500 as investors panicked from the prospect that cheap capital may not come as soon as expected. But, greater uncertainty in the US-China trade war may continue to dampen investment and CPI and pressure the Fed to cut rates sooner.

GERMAN ZEW SURVEY

German ZEW Survey Expectations are currently estimated to come in at -28, lower than the previous -24.5 print. A reading at that level would mark the lowest point since November 2011, a period when Greece’s government was facing a solvency crisis. Data out of the Eurozone has been tending to show weakness with Germany’s slowing economy sending a chill up the spine of investors from all over the world.

The region’s economic vulnerability is compounded by the political wounds it is sustaining from Brexit and volatile politics in the Mediterranean. Italy risk may once again make a reprise on the regional – and world – stage as Deputy Prime Minister Matteo Salvini attempts to consolidate power and replace the current PM.

A Lega-Nord led government would likely run into a budgetary tussle with Brussels again. Only this time, the economic backdrop may be far less stable than it was six months ago. To learn more about how politics impacts financial markets, be sure to follow me on Twitter @ZabelinDimitri.

CHART OF THE DAY: GERMAN ZEW SURVEY EXPECTATIONS

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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter