USD Supported By Accelerating Inflation Rates

Jul 14 21, 10:31 GMT

The greenback got considerable support yesterday against a number of its counterparts as the US inflation rates accelerated beyond market expectations and its characteristic that the headline CPI rate year on year reached a level not seen since August 2013. The acceleration of the US inflation rates increased expectations for the Fed to tighten its monetary policy rather sooner than later. The market’s attention now turns to Fed Chair Powell’s testimony before Congress today and tomorrow for any signals on the timing of a tapering of stimulus and higher interest rates. Should Powell stress the need for patience in the face of accelerating inflation we may see the USD losing steam and weakening while should the Fed’s Chairman recognize or signal the need for an earlier tightening of the bank’s monetary policy, we may see the USD gaining further. The USD Index rose yesterday breaking the 92.30 (S1) resistance line, now turned to support, and continued higher yet seems to have reached a ceiling for now at the 92.75 (R1) resistance level. Given the index’s relative stabilisation during the Asian session today we may see it maintaining a sideways motion and for it to change for a bullish outlook we would require a clear breaking of the 92.75 (R1) resistance line. Please note that the RSI indicator below our 4-hour chart is between the readings of 50 and 70, implying an advantage for the bulls, yet Powell’s speech later today could affect the Index to either direction. Should the bull’s actually take over we may see the index breaking the 92.75 (R1) resistance line and aim for the 93.45 (R2) level. Should the bears prevail, we may see index breaking the 92.30 (S1) support line and aim for lower grounds.

BoC to taper QE program?

Today during the American session, we get from Canada, BoC’s interest rate decision. The bank is widely expected to remain on hold at 0.25% and currently CAD OIS imply a probability of 90% for such a scenario to materialize. We expect the bank to maintain a confident tone in its accompanying statement and could also taper its bond buying program. The rise of Covid cases could endanger the tightening of the bank’s QE program, as it could threaten the country’s growth potential. The tightening Canadian employment market, as well as the accelerating inflation rates could the bank towards further tightening of its QE program. Overall, we see the risks related to the event as tilted to the bullish side for the Loonie, unless the bank fails to reach the market’s hawkish expectations, in which case the CAD could weaken asymmetrically.

USD/CAD rose yesterday breaking the 1.2470 (S1) resistance line, now turned to support and stabilised between the S1 and R1 levels. We tend to maintain a bias for a sideways motion, yet BoC’s interest rate decision could create substantial volatility for the pair as well as Powell’s testimony. Should buyers be in control of the pair’s direction, we may see it breaking the 1.2560 (R1) resistance line and aim for the 1.2650 (R2) level. Should the market display a selling interest for the pair, we may see it breaking the 1.2470 (S1) support line and aim for the 1.2400 (S2) level.

Other economic highlights today and the following Asian session:

Today during the European session we get UK’s CPI rates for June and from Turkey we get CBRTs’ interest rate decision. The bank is expected to remain on hold at 19% and if so we may see TRY weakening given the accelerating inflation rates in Turkey and CBRTs’ unwillingness to act. Oil traders may be more interested in the release of the weekly US EIA crude oil inventories figure. During the Asian session we get from Australia June’s employment data and a bit later we get from China the industrial output and retail sales growth rates for June and the GDP rate for Q2. On the monetary front we note that ECB Board Member Schnabel, BoE Deputy Governor Ramsden and Minneapolis Fed President Kashkari are scheduled to speak.

USD Index H4 Chart