US Inflation & Risk-On Sentiment

1. Macro Context: All about US Inflation

After last week’s employment figures (disappointing NFP but unemployment down to 4.4%), attention now turns to prices. The consensus watches the PPI (Producer Price Index) as a major catalyst for the Fed.

The Fundamental Mechanics: If the PPI comes out above expectations, it will signal a persistence of upstream inflation. The Federal Reserve would then be forced to keep its rates high (“Higher for Longer”). Mechanically, this would increase the yield on US bonds, attracting capital to the Dollar.

2. Currency Dynamics (FX)

USD (Dollar): The landscape is mixed. Although January historically offers positive seasonality, recent fundamentals weigh on the greenback.

EUR (Euro): The single currency lacks its own catalysts following the slowdown in inflation noted previously. It remains driven by the inverse correlation to the Dollar and benefits from a continuous buying flow according to COT reports.

CAD (Canadian Dollar): This is the notable underperformance. The “Loonie” suffers and appears as the weak link of the G10, put under pressure by speculators (increase in short positions).

3. Market Sentiment & Commodities

The analysis reveals a paradox: despite a mixed macroeconomy, we are in a “Risk-On” environment. Managers hedge on the S&P 500 (rise in shorts) but remain very confident on Tech/Nasdaq.

On the commodities side, Gold and Silver outperform. However, the historical inverse correlation between the Dollar and Gold must be watched closely ahead of the CPI.