It’s a busy week on the calendar with inflation taking centre stage. With a wide list of countries reporting their latest price changes focus on the end of the week will shift towards the US as it releases its July CPI update.
Consumer prices are expected to have trended higher in July after a larger-than-expected, but welcomed, drop in June. Analyst forecasts see headline CPI rising to 3.3% in July, whilst core CPI drops slightly from 4.8% to 4.7%. These expectations have been building because despite a drop in the July NFP data, average hourly earnings have remained elevated throughout the month, putting upward pressure on domestic inflation.
The recent data supports a soft-landing scenario which would indicate inflation continues moderating towards the 2% target whilst growth in the economy holds its ground. This would demand the Federal Reserve keep its course with its recent monetary policy, pushing back any hopes of a rate cut until much later next year. Markets will be able to gauge the most recent sentiment from the central bank as Philadelphia Fed President Harker and Richmond Fed President Barkin speak later today after the Fed’s 25bps hike two weeks ago.
A CPI reading that falls in line with expectations and shows an acceleration of prices in July would enable the Federal Reserve to hike another 25bps in September. This will most likely propel US yields even higher, pushing up the US dollar, and weighing on the likes of gold, silver, and the stock market.
On the contrary, if we see a softer-than-expected reading then we may see the greatest volatility potential as markets reverse the momentum from the previous days and we see another relief rally in stocks and risk-on assets like the one seen after the June data came out in mid-July.
EUR/USD daily chart – Source: tradingview
The last 3 weeks have seen EUR/USD undo most of the gains seen at the beginning of July as the pair has retraced over 3%. Buyers have been battling to take control throughout the pullback, but the path of least resistance has been firmly lower. That said, there is still some support left along the upward-sloping trend line from the June and July lows although it is likely that this line will be invalidated soon. If the selloff intensifies, the path is clear for the pair to reach 1.0850 before finding further support. On the flipside, the 1.10 mark remains a key area to tackle.
GBP/USD
GBP/USD daily chart – Source: tradingview
GBP/USD has put some good effort to recover some upside momentum but so far, the strength in the dollar is overshadowing the pound. The fact that the BOE still has further room to go with bringing down inflation to its target, compared to the Fed, the expected tightening of the rate differential could play in favour of the pound and keep GBP/USD supported.
There seems to be a fair amount of support centred around 1.2680 so another run toward the 1.30 mark cannot be discarded.
USD/JPY
USD/JPY daily chart – Source: tradingview
It’s been a volatile few weeks for USD/JPY with both sides of the pair bringing momentum to the mix. The Bank of Japan’s unexpected widening of its yield curve control (YCC) bands has seen yields shoot up both in Japan and the US, supporting both currencies along the way, but the unexpected deviation from its ultra-loose monetary policy stance allowed JPY buyers to get ahead for a few days.
That said, USD/JPY has been building bullish momentum over the past few days as, despite the change in YCC and persistence in domestic inflation, the Bank of Japan (BOJ) continues to justify the need for continued loose monetary policy, which is weighing on the yen. USD/JPY needs to tackle resistance at 143.80 and 144.90 before being able to attempt a further bullish rally.
