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Lower CPI changes the game

USD sold off as both the headline and the core CPI came in lower than forecasted and lower than in June. As expected, lower oil prices indicated the inflation rate would be lower than in the previous report. The following rally moved the DJ to May highs while commodity currencies all staged sizeable rallies. USDJPY took a dive as I warned yesterday. Strong deviation in the CPI number tends to translate to great swings in this rate-sensitive currency pair. Gold traders, however, didn’t get excited about the sell-off in the dollar. The reason could be the lack of upside reaction in the benchmark 10 yr. treasury yield. If the yield doesn’t start moving higher then the rally in risky assets might not be sustainable. This is something to keep an eye on. The next key risk event is the US PPI numbers release. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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DJ chart 08 11

DJ – I chose to highlight DJ as a bullish market in our Market Movers report on Tuesday. Since then the market has rallied substantially. The bull move was mostly propelled by the CPI release that moderated the rate hike expectations. The probability for a 75 bp hike in September dropped to 40.5% from 68% on August 9th. The market is now approaching a key resistance level (33477) but stays bullish above the 32700 support. So, momentum is to the upside but the 33477 could slow the bulls down. The nearest key price levels in the 8h chart are 320700, 33108 and 33477. 

USDCHF chart 08 11

USDCHF was another great pick Market Movers report. The pair was trending lower in the 2h chart at the time and dropped significantly as the CPI disappointed the USD bulls. Looking at the daily chart the market is trading between a historical support level at 0.9367 and a resistance area at 0.9470 – 0.9495. With the trend extended to the downside the risk of the market snapping back has increased but at the same time the dollar is under pressure now so the market is still in a downtrend. 

If the market creates a higher low above 0.9393, look for a break above the nearest resistance at 0.9545. This would open up a way to the 0.9470 – 0.9495 range. Alternatively, if the 0.9393 breaks the historical support at 0.9367 is likely to come into play. 

USDJPY chart 08 11

USDJPY – It was my view yesterday that this market would move to 133.50 if the 134.35 support gets violated. As the CPI came in lower than expected the pair not only moved to the level but exceeded it substantially hitting 132.02 before recovering. The pair is now fluctuating between 132.02 and 133.31. If the bulls defend the levels above 132.02 we might get a rally to 134 but a break below the 132.02 level would be likely to move the market to 131.30 or so. 

Macroeconomic news

The headline US inflation rate for June (annual) dropped more than expected. The July reading came in at 8.5% after a 40-year high of 9.1% prior. Analyst forecasts had put the number at 8.7%. The cost of energy rose 32.9% (vs. 41.6% in June). Lower cost of petrol (44% vs 59.9%), fuel oil (75.6% vs 98.5%) and natural gas (30.5% vs 38.4%) contributed to the decline. The cost of electricity however increased by 15.2%. Food inflation however increased by 10.9% vs 10.4% prior. 

Macro Drivers for the USD 

As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveFed hiked the target range again by 75bps (to 2.25%-2.5%). This was the fourth consecutive rate hike. The rate hike was in line with analyst forecasts. The Fed noted that ongoing increases in the target range will be appropriate but the next decisions will be data-dependent.
YieldsThe 10-week range in the US 10-year treasury yield has been from 2.516% to 3.498%. 
EmploymentThe US economy added 258 thousand new jobs. June number was revised from 390K to +384K and the average hourly earnings increased 0.5% (month over month) vs 0.3% predicted by the analysts. Such strong growth in employment and earnings reminds us how strong the US economy still is. 
InflationThe US headline inflation rate for June (YoY) dropped more than expected. The July reading came in at 8.5% after a 40-year high of 9.1% prior. Analyst forecasts had put the number at 8.7%. The cost of energy rose 32.9% (vs. 41.6% in June). Lower cost of petrol (44% vs 59.9%), fuel oil (75.6% vs 98.5%) and natural gas (30.5% vs 38.4%) contributed to the decline. The cost of electricity however increased by 15.2%. Food inflation however increased by 10.9% vs 10.4% prior. 

 The Next Main Risk Events

  • USD PPI m/m
  • USD Core PPI m/m
  • USD Unemployment Claims
  • GBP GDP m/m
  • GBP Prelim GDP q/q
  • USD Prelim UoM Consumer Sentiment

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta

Chief Market Analyst

TIOmarkets.com

DISCLAIMER TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyzes and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with any legal requirements for financial analysis and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval. FX and CFDs are leveraged products. They are not suitable for every investor, as they carry a high risk of losing your capital. Please ensure you fully understand the risks involved. All the prices in this report are CFD prices based on price charts provided by TIOmarkets unless otherwise stated. 

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