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The biggest risk event of the week!

Today’s the biggest day of the week for the financial markets as traders around the globe prepare to trade the US CPI release. Higher inflation readings would provide ammunition for the Fed hawks and strengthen the dollar. A stronger than expected CPI reading would be likely to soften the bids in bonds equities, commodities and commodity currencies. On a monthly level, both the headline and core are expected to dip somewhat. Analyst consensus puts the headline change at 0.2% (vs. 1.3% prior) and the core at 0.5% (vs. 0.7% prior). The annual inflation rate in the US for June rose from 8.6% in May to 9.1%. This was the highest reading since 1981 with energy prices rising contributing strongly to the CPI (41.6%). Now the crude oil trades lower which is likely to bring the headline CPI lower. The US CPI release is scheduled one hour before the New York equities trading starts.  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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Gold chart 08 10

Gold continues in the uptrend but yesterday’s momentum loss above the 1794.91 resistance shows that the bulls are being careful ahead of the US CPI release. Gold’s likely to be a strong mover if the CPI numbers deviate strongly from the expectations. All in all, the up trend is losing momentum (a wedge is being formed) but as long as the key supports aren’t broken the market is in an uptrend. The nearest key price levels for gold are 1754.24, 1764.94,1787.83 and 1800.35. 

USDJPY chart 08 10

USDJPY is a rate-sensitive market so watch out for a strong reaction if the CPI surprises the traders (strong deviations from the analyst consensus numbers). The market is trending higher but is also near to a key resistance level at 135.58. If the nearest key support at 134.35 holds look for a move to 136.30 or so. If the 134.35 support is violated and then we are likely to see a retracement roughly to 133.50. The nearest key price levels for USDJPY are 132.52, 133.42, 134.35 and 135.58. 

NZDUSD chart 08 10

NZDUSD – The dollar pairs moved sideways yesterday and the NZDUSD pair wasn’t an exception. Even though the market showed some signs of weakness in the Asian session the rest of the day was spent in a range between 0.6270 and 0.6302. The downward sloping trendline wasn’t penetrated decisively. The nearest key price levels are 0.6211, 0.6253, 0.6270, 0.6304 and 0.6314. 

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 annualised inflation rate for June accelerated to 9.1%. This was the highest reading the Q4 1981 (up 0.5% from May). The cost of energy rose 41.6%. Fuel prices increased 59.9%. These were the biggest increases in these items since Q2 1980. Food costs surged 10.4%, the most since Q1 1981.

 The Next Main Risk Events

  • USD CPI m/m
  • USD Core CPI m/m
  • 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

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