HomeContributorsFundamental AnalysisLackluster US Inflation Data Weigh On The Dollar

Lackluster US Inflation Data Weigh On The Dollar

The greenback took another hit on Friday, after the US CPI data for July disappointed market expectations. Even though the core CPI rate remained unchanged as anticipated, the headline rate rose by less than what was expected, likely leading investors to add to their short-USD positions. This lackluster set of data was soon followed by some cautious comments from Dallas Fed President Robert Kaplan, who is a voting FOMC member this year. He said that he would like to see evidence of progress towards the inflation target before raising rates again, and that he is “willing to be patient” for now. Indeed, the probability for another hike this year fell to below 40% in the aftermath of these developments from roughly 50% previously, according to the Fed funds futures.

Even though the outlook for the dollar remains negative, and we are not calling for a reversal yet, we should point out that the short-USD trade is looking increasingly crowded to us. Market expectations for another near-term Fed hike are already very subdued, and economic data have frequently surprised to the downside lately. Meanwhile, the continued uncertainty on the US political front probably intensified the negative sentiment surrounding the greenback. Bearing all these in mind, we believe that further downbeat US developments could have a diminishing negative impact on the dollar, while any positive US news could result in strong upside reactions, especially considering the thin-liquidity trading environment in August.

The next major market mover for the dollar will probably be the minutes of the July FOMC meeting, due out on Wednesday. We will look for specific details as to when the Fed is set to announce a normalization of its enormous balance sheet, and on whether the “cautious” camp among the FOMC has grown larger in the face of soft inflation.

EUR/USD rebounded following the US CPI data on Friday from near the crossroads of the 1.1750 (S1) hurdle and the short-term uptrend line taken from the low of the 23rd of June. The rate hit resistance a few pips above the 1.1830 (R1) level and subsequently, it retreated somewhat. Given that the rate continues to trade above the aforementioned line, we consider the short-term picture to still be positive. As such, we would expect the bulls to retake control soon and perhaps aim for another test near the 1.1830 (R1) zone. A clear break above that barrier could pave the way for further upside extensions towards our next resistance at 1.1900 (R2).

How big of a concern is the strong AUD for the RBA?

During the Asian day Tuesday, the RBA will release the minutes of its August policy gathering. At that meeting, the Bank acknowledged the latest progress in employment growth, but maintained its concerns regarding subdued wage growth. Perhaps more importantly, the officials expressed discomfort with the latest AUD appreciation. Even though the currency reacted little at the time, Governor Lowe recently raised the stakes by reminding investors that direct FX intervention is always on the table if needed. As such, these minutes may be closely watched for more details regarding how big of a concern the strong AUD is for policymakers. Clear signals that the Bank wants a lower Aussie or any mention to intervention, could weigh on the currency. Having said that, we think that AUD’s short-term direction may be primarily decided by the wage data for Q2, due out on Wednesday.

AUD/USD traded higher on Friday after it hit support at 0.7840 (S2), and during the early European morning Monday, it is trading marginally above the 0.7900 (S1) level. Even though the price structure on the 4-hour chart suggests a short-term downtrend, considering the rate’s proximity to the key barrier of 0.7800 (S3), we prefer to stay sidelined for now. That hurdle was the upper bound of the sideways range that contained the price action from the 2nd of March 2016 until the 14th of July and thus, it may be proved a rebound zone now that the rate is trading above it. As such, even in case the pair dips on the RBA minutes tonight, we would remain mindful of a potential rebound from near 0.7800 (S3). We prefer to wait for a clear close below that level before we begin to examine the case for larger declines.

Today’s highlights:

The calendar is very light today. The only noteworthy indicator we get is Eurozone’s industrial production for June.

As for the rest of the week:

On Tuesday, besides the RBA minutes, we also get CPI data for July from both the UK and Sweden. In the US, retail sales for the same month are due out. On Wednesday, the main event will probably be the July FOMC minutes. We also get Australia’s wage price index for Q2 as we already mentioned, as well as the UK employment data for June. On Thursday, focus will be on Australia’s jobs data and UK retail sales, both for July. Finally on Friday, Canada’s inflation data for July will take center stage.

EUR/USD

Support: 1.1750 (S1), 1.1715 (S2), 1.1655 (S3)

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

AUD/USD

Support: 0.7900 (S1), 0.7840 (S2), 0.7800 (S3)

Resistance: 0.7950 (R1), 0.8000 (R2), 0.8060 (R3)

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