Market sentiment remains tense ahead of the upcoming release of US July Consumer Price Index (CPI) data, with financial assets showing heightened sensitivity to economic indicators. The recent US Producer Price Index (PPI) data for July showed a 0.1% year-on-year increase, slightly below the consensus forecast of 0.2%. This development pushed the probability of a 50-basis-point rate cut in September to 53%, while the US dollar index fell to 102.60, marking its lowest closing level since the beginning of the year.

The dollar's weakness triggered broad-based rebounds in non-US currencies during the previous trading session. The euro approached the 1.1000 threshold, while the British pound recorded five consecutive days of gains, closing at 1.2863. Commodity currencies such as the Australian and New Zealand dollars registered more substantial increases. US equity markets closed higher across the board on Tuesday, with AI-related stocks staging a comprehensive recovery, though gold and WTI crude oil prices edged lower.

Busy Economic Calendar Ahead

Wednesday's economic calendar features several key events that could significantly impact currency markets. The Asian session will see the Reserve Bank of New Zealand's rate decision, followed by UK CPI data during European hours - both likely to influence the New Zealand dollar and pound in the short term. However, the most consequential event for global asset prices will be the US July CPI release at 20:30 GMT.

This CPI report represents the first major economic indicator since last week's global equity sell-off. Market consensus expects the headline CPI to decline from 3% (a 13-month low) to 2.9%, with the monthly figure previously dropping to -0.1% - the lowest pandemic-era reading. Core CPI is anticipated to ease from 3.3% (a three-year low) to 3.2%.

Recent consumer survey data from the New York Fed showed three-year inflation expectations declining 0.6% month-over-month to 2.3%, the lowest level since 2013. However, one-year and five-year inflation expectations remained unchanged at 3% and 2.8%, respectively.

Potential Market Scenarios

A higher-than-expected CPI reading could fuel a dollar rebound and pressure the recently recovering US stock market. Conversely, a slightly softer print might bolster rate cut expectations, potentially boosting gold and technology stocks while laying groundwork for a September rate reduction. In such a scenario, the Federal Reserve would likely shift its focus from inflation to labor market conditions.

A substantial negative surprise (such as negative monthly core CPI growth) could trigger market panic and another round of global equity selling. This framework applies equally to other upcoming economic releases, including Thursday's July retail sales data and Friday's University of Michigan August consumer sentiment index.

Gold and Commodity Markets

Gold reached a record closing high on Monday, now standing just shy of its all-time peak. Rising Fed rate cut expectations have pressured both nominal and real Treasury yields along with the dollar index, providing fundamental support for bullion. However, renewed interest in US equities (particularly AI-related stocks) may divert some attention from gold.

Technically, gold's short-term uptrend line provides support. A softer CPI reading could help prices challenge and potentially surpass historical highs, while stronger data might pressure the somewhat overbought metal. A break below the trendline would complete a triple-top pattern, potentially leading to consolidation toward the 200-day moving average (currently below $2,400).

Notably, gold's implied volatility stands at 28.6%, suggesting a potential 24-hour trading range between $2,420.67 and $2,509.69. Beyond economic data, Middle East developments continue influencing gold prices.

In oil markets, WTI crude faces near-term resistance at $79, with technical indicators suggesting overbought conditions requiring correction. Maintaining support above $78 would preserve the reversal structure, keeping the door open for another test of recent highs. A breakout above $79.30 could target the $81-$82 zone, though reduced geopolitical risks and OPEC's downward revision of 2023-24 demand growth expectations limit upside potential. Initial downside support appears at $76.30.

Currency Market Dynamics

The dollar-yen pair has shown modest recovery over the past week following a cumulative 12% decline. However, rapidly narrowing US-Japan yield differentials and significantly reduced yen short positions continue weighing on the exchange rate. From a technical perspective, the 149.30 area (marked by moving averages and trendlines) represents critical resistance. A sustained break above this level could open the path toward 151.60 and potentially 154.

The release of US July CPI data promises far-reaching consequences across all financial markets, warranting close attention from investors worldwide.