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Fundamental Analysis

Fed's Dudley Appears As Optimistic As He Can

Typography

The President of the New York Fed maintained a relatively neutral tone in his comments yesterday. He said that inflation is likely to pick up soon, boosted by a tight labor market and the dollar's plunge. However, he noted that this progress is unlikely to show up in the yearly inflation rate until the recent weak monthly prints drop out of the yearly calculation, in roughly 6-10 months. USD dropped somewhat after his remarks, as they probably appeared dovish at first glance. However, we believe that these signals do not rule out the prospect of another rate hike this year. In our view, Dudley's comments imply that even though the yoy rate in inflation may remain below 2% for a while, the Fed could continue hiking as long as we get decent monthly prints. Thus, markets may keep their gaze locked on today's CPI data for July, as they could either confirm or disprove Dudley's view.

The forecast is for the headline CPI rate to have risen slightly, while the core rate is expected to have held steady. Such prints would be in line with Dudley's view and may thereby support the greenback somewhat. However, unless the core rate rebounds as well, we doubt that this data set will have much impact on market expectations for the timing of the next Fed hike.

EUR/USD traded somewhat higher yesterday after it hit support near the crossroads of the 1.1715 (S1) level and the short-term uptrend line taken from the low of the 23rd of June. As long as the rate remains above that line, we consider the short-term outlook to still be positive. Even if the US CPIs come as expected today and thereby support somewhat the dollar, we don't expect this to trigger a trend reversal. The bulls may take advantage of the mild slide and perhaps aim for another test near 1.1830 (R1). A clear break above that level could pave the way for another test near the 1.1900 zone. We believe that a decent rebound in the US core CPI rate is needed to cause the greenback to rally and bring a short-term trend reversal in EUR/USD.

RBA's Lowe takes a page from Wheeler's book; mentions FX intervention

Speaking overnight, RBA Governor Philip Lowe noted that a lower Australian dollar would help the economy to get back to full employment more quickly, something he does not expect to happen for at least 2.5 years. What's more, the RBA chief took a page from RBNZ Governor Wheeler's book, as he followed that comment with a reminder to investors that the RBA is prepared to intervene in the FX market in extreme situations. Even though he added that the Bank is not ready to intervene at the moment, his mere reference to intervention was enough to send the Australian dollar somewhat lower.

We believe that the outlook for the Aussie is neutral at the moment. Even though the Australian economy is humming along well, the RBA's recent AUD jawboning seems to be finally having some effect. We think that the currency's outlook could clear up next week, after the all-important wage data for Q2 are released. Given the RBA's continued concerns about subdued wage growth, we believe that these prints will probably determine whether the Bank is likely to turn hawkish anytime soon.

AUD/USD traded lower on Thursday, after it hit resistance at 0.7900 (R1). Now the rate is testing the 0.7840 (S1) support, where a dip could challenge the key territory of 0.7800 (S2) as a support this time. Although the price structure on the 4-hour chart suggests a short-term downtrend, the rate's proximity to the 0.7800 (S2) obstacle solidifies our view to remain sidelined for now. That hurdle acted as the upper bound of the sideways range that contained the price action from the 2nd of March 2016 until the 14th of July, and it may be proved a rebound point now that the rate is trading above it. We would like to see a clear close below that zone before we start examining the case for larger declines.

As for the rest of today's highlights:

Besides the highly-anticipated US CPI data for July, we also get Germany's final CPI for the month. However, given that the final print is expected to confirm the preliminary estimate, any reaction in EUR may be limited.

We have two speakers on the agenda: Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari. Both are voting members of the FOMC this year, but we think that market focus will fall mainly on Kaplan, as he will be speaking a few minutes after the CPI prints are released.

EUR/USD

Support: 1.1715 (S1), 1.1655 (S2), 1.1615 (S3)

Resistance: 1.1830 (R1), 1.1900 (R2), 1.1980 (R3)

AUD/USD


Support: 0.7840 (S1), 0.7800 (S2), 0.7710 (S3)

Resistance: 0.7900 (R1), 0.7950 (R2), 0.8000 (R3)


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