This morning the government reported that U.S. consumer prices edged up to 0.1% in May. This report indicates that inflation is not yet the issue that traders speculated it would be following months of Treasury debt auctions. Based on the results of this report, it looks as if the debate will rage on as to when high inflation will return.

This report also confirms what the Fed has been saying and that is, inflation will not be an issue this year.

Prior to the report, the U.S. Dollar was trading slightly better overnight. Now it looks like a mixed picture with the Dollar beginning to lose ground. The direction of the Dollar will be the key as to how the other markets will trade. This is how it’s been all week.

A stronger Dollar will mean traders will be more averse to risk. This would put downside pressure on equities and commodities. A weaker Dollar will help increase demand for higher risk assets.

There has been almost no reaction in the equity markets to the CPI report. The September E-mini was trading lower into the number and is currently trading flat to lower. This market has reached an important retracement area at 903.75. The actual low overnight is 903.00.

Buyers have been coming in on dips so the opportunity to buy is there for the taking at this time. All bets are off for a rally if 903.00 is violated and the market accelerates down after the penetration. Regaining 913.00 will be a strong sign that this market is ready to rally back to at least 927.50.

September Treasury Bonds are trading sharply higher overnight. This is a combination of an oversold market as well as traders seeking protection in Treasuries after the break in the equities. This short-term trend is likely to continue until tomorrow when the Treasury Department announces its next auction. A quick rally in equities could trigger a retreat in Bond prices, however, this morning.

August Gold has also reached a key retracement area and could be attracting buyers from this level. It looks like the low inflation this morning was already priced into the market. Traders selling gold after the report may be trapped and forced to cover if this market doesn’t break. The conditions are ripe for a short-covering rally.

The stronger Dollar is keeping September Crude Oil traders away from the long side of the market. In fact, it looks as if profit-takers are willing to drive this market lower in an effort to buy at cheaper prices. There is also a clash developing between short-term and long-term traders.

Short-term, the world remains awash in crude oil so nearby markets should not be rallying as strongly as the deferred contracts. Near-term weakness could develop as traders dump the September contract while simultaneously buying contracts over a year out.

The stronger Dollar is expected to keep downside pressure on the Grains complex. Despite calls for lower inventory in soybeans, weather conditions have been ideal. This condition combined with low demand should keep a lid on any rallies at this time.

December Corn could especially feel pressure if crop conditions improve to the point where it catches up to annual averages.

The stronger Dollar is also expected to keep a lid on a rise in the softs complex. Cocoa and Coffee are feeling the brunt of the stronger Dollar. Cotton has been weak for the same reasons as the Grains; lower demand and great growing conditions.

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