In her second testimony before Congress yesterday, Fed Chair Yellen provided little new information on policy to guide dollar traders. The most noteworthy point she made in our view, was that even though low inflation is owed to temporary factors like cheaper prices for phone plans and prescription drugs, there ‘may be more going on’. However, she quickly added that it is premature to conclude the underlying inflation trend is falling well short of 2%.
Given the lack of concrete signals from the Fed, we think investors are likely to turn their eyes to today’s CPI and retail sales releases for June in order to gauge the likelihood of another rate increase this year. Getting the ball rolling with the CPIs, the headline rate is expected to have slid for the 4th consecutive month, while the core rate is anticipated to have held steady after falling for 4 months in a row as well. We believe traders will have their gaze locked primarily on the core rate, where we see the risks surrounding the forecast as tilted to the upside, given that the nation’s Markit services PMI for the month showed that prices charged rose at the fastest pace for 16 months.
As for retail sales, the forecast is for both the headline and core rates to have rebounded from the previous month. The consensus for a rebound is supported by both the Conference Board and U of M consumer sentiment indices for the month, both of which rose. A rebound in sales combined with a potential upside surprise in the core CPI rate could raise the likelihood for another Fed rate hike this year and thereby, reverse some of the dollar’s recent losses.
USD/JPY traded higher yesterday after it hit support near the prior downside resistance line taken from the peak of the 11th of January. Then, the rate hit resistance at 113.60 (R1). In our view, the fact that the pair continues to trade above the aforementioned medium-term downside line keeps the door open for further advances. A clear break above 113.60 (R1) could initially aim for the 114.00 (R2) hurdle, where another break may target again the key resistance territory of 114.40 (R3). The catalyst for such a move may be a possible rebound in the US core CPI rate today. Having said that though, if inflation continues to slow, we may see the pair sliding back below the key downside resistance drawn from the peak of the 11th of January, something that may turn the picture negative, at least for a while.
XAU/USD traded lower yesterday after it hit resistance slightly below the downtrend line drawn from the peak of the 7th of June. As long as the precious metal is trading below that line, we consider the near-term outlook to be negative and as such, we would expect a dip below 1215 (S1) to aim for another test near the 1205 (S2) line. However, as we get closer to the 1200 (S3) psychological barrier, we would be careful of a possible rebound, as the 1200 (S3) zone appears to be the lower bound of a medium-term sideways range that contains the price action since the end of January. We prefer to wait for a clear close below 1200 (S3) before we get confident on larger declines.
As for the rest of today’s highlights:
During the European day, the economic calendar is relatively light. The only notable indicator we get is Eurozone’s trade balance for May, though no forecast is available. From the US, besides the CPIs and retail sales, we will also get the nation’s industrial production for June and the preliminary U of M consumer sentiment index for July.
We have only one speaker on the agenda: ECB Governing Council member Ewald Nowotny.
USD/JPY
Support: 113.15 (S1), 112.85 (S2), 112.50 (S3)
Resistance: 113.60 (R1), 114.00 (R2), 114.40 (R3)
XAU/USD
Support: 1215 (S1), 1205 (S2), 1200 (S3)
Resistance: 1230 (R1), 1240 (R2), 1248 (R3)
