US CPI rates in focus

The USD tended to remain relatively unchanged against its counterparts yesterday as the market seems to have repositioned itself ahead of the release of the US CPI Rates for July later today. The headline rate is expected to remain unchanged at a month-on-month level while it is also expected to accelerate to 3.3% year on year. At the same time, the core rates are expected to remain unchanged both on a month-on-month and a year-on-year level. Should the actual rates meet their respective forecasts or even accelerate beyond market expectations that could be perceived as a sign of stubborn inflationary pressures that would require the Fed to take additional action. It should be noted that since the bank’s last meeting, Fed policymakers had made conflicting statements with some implying that the bank may have reached its terminal rate or is nearing it, while others stated that more rate hikes will be required thus allowing for some uncertainty to exist regarding the bank’s future intentions. Should the rates accelerate as stated before we may see the USD getting some support while a possible deceleration would be unexpected and may solidify the market’s expectations for the bank to remain on hold until the end of the year and thus may weaken the USD. Yet the release is expected to have ripple effects beyond the FX market. A possible acceleration of the CPI rates could weaken US stock markets and gold prices and vice versa, a slowdown may provide some support for US equities as it may ease market worries for the Fed.

On a technical level, the USD advanced against the JPY, as USD/JPY broke the 143.35 (S1) resistance line, now turned to support. We tend to maintain a bullish outlook for the pair as long as the upward trendline continues to guide the pair and given that the RSI indicator remains close to the reading of 70, implying a bullish market sentiment for the pair. Should the bulls maintain control as expected, we may see USD/JPY breaking the 145.10 (R1) resistance line and aim for the 146.80 (R2) resistance level. Should the bears take over we may see the pair breaking the prementioned upward trendline in a first signal of an interruption of the pair’s upward movement and USD/JPY may continue lower breaking the 143.35 (S1) support line aiming for the 141.90 (S2) support base.

Across the world we note that the People’s Bank of China provided some support for the Yuan after July’s CPI metrics showed deflationary tendencies within the Chinese economy. Yet we tend to maintain our worries about the economic recovery of China at the current stage. On a more fundamental level, we note that US President Biden signed an executive order that will prohibit partially at least, new investment in China with focus being on sensitive technologies such as semiconductors and microelectronics. The decision is not to go down well with the Chinese government and its reaction is expected on the issue, hence tensions are expected to re-escalate to some degree in the US-Sino relationship and may weigh on the Yuan and the Aussie given the close Sino-Australian economic ties.

AUD/USD seems to have hit a floor on the 0.6515 (S1) support line. Given that the pair has broken the downward trendline guiding it, we switch our bearish outlook in favour of a sideways motion bias for the time being. Should the pair find extensive fresh buying orders along its path we may see AUD/USD breaking the 0.6620 (R1) in search for higher grounds. Should a selling interest be expressed by the market we may see AUD/USD breaking the 0.6515 (S1) support line and aim for the 0.6400 (S2) support barrier.

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Today we note the release of Norway’s and the Czech Republic’s CPI rates for July and the US weekly initial jobless claims figure. On the monetary front, please note that Philadelphia Fed President Harker and a bit later in the Asian session RBA Governor Philip Lowe are scheduled to speak.