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The first drop in the US PPI in 2 years

Lower oil prices helped to soften the US PPI and the measure had its first decline in two years. The US PPI (Producer prices) dropped 0.5% m/m. Analyst expectation for the number was 0.2%. Lower fuel costs contributed significantly to the decline (16.7% drop in the price of petrol). Annualized producer inflation dropped to 9.8%, the level is the lowest since October last year. In the markets, we are seeing some weakness in stocks as bonds didn’t attract bidders yesterday and yields started to rise. This weighs on gold too as the dollar is strengthening. Today’s GDP numbers from the UK weren’t as bad as analysts had expected. UK economy is slowing down but there’s been no significant reaction in GBPUSD after the release. Today’s key risk event is the release of the Prelim UoM Consumer Sentiment survey. 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 12

Gold – I warned (here) that gold bulls were getting a bit careful. The market has been wedging and while it’s technically still in an uptrend a wedge like this is a risk factor. It tells you that price advances are getting weaker and increase the probabilities for market reversal. Yesterday’s lower daily high is another warning sign and we should remember that all this price action takes place inside the medium-term target range I talked about in July. T-bonds are weak pushing the yields higher, which in turn supports the dollar. With the USD probably strengthening gold could break the key support at 1783.17. This would open the way to the 1771 – 1775 range. However, above the 1791.93 level, gold is still technically in an uptrend and would be likely to move to the 1800 – 1805 range if the level was taken out decisively. The nearest key price levels for gold are 1764.94, 1783.17, 1791.93 and 1807.88. 

DJ chart 08 12

DJ – The market started to slow down around the 33477 key resistance as expected (see here). This momentum slowdown could lead to DJ correcting lower today as longs often become careful when they see a rally into new highs failing. The 8h trend is still up though and we need to see a reversal process completed before the market turns bearish. If you trade intraday, this is a time to keep a close eye on how your shorter timeframe long signals perform. If your long signals fail then prepare to see a corrective move lower. In the medium-term DJ stays bullish above 32900. The nearest key price levels in the 8h chart are 320700, 33108, 33477 and 33650. 

USDCHF chart 08 12
USDCHF chart 08 12

USDCHF – The 0.9367 support attracted buyers and yesterday’s low print was only 3 pips above it. This obviously doesn’t change the bigger picture I wrote about yesterday (see here). In a two-hour timeframe chart, the market is still trending lower but the proximity of a major support level could mean the downside is limited. If the key resistance levels are violated, look for long trade signals. The nearest key price levels in the 2h chart are 0.9423 and 0.9445. If the bulls can’t push the market above these levels, we might get a new push lower. Possibly below yesterday’s low or further consolidation above the level (0.9370).

USDJPY chart 08 12

USDJPY looks bullish. A decisive break above the 133.31 level would quite likely take the market to the 134 – 134.20 range (my target above the 133.31 threshold level). An alternative scenario: There’s no decisive break above the level and the market trades down to the 130.40 – 130.95 range. The nearest key price levels USDJPY are 131.73, 132.88, 133.31 and 134.35. 

Macroeconomic news

UK June GDP at -0.6% beat the analyst expectations (-1.2%) but the growth rate of the economy was much lower than in July (+0.4%). Compared to the same quarter in 2021 the 2022 Q2, GDP expanded by 2.9%. The annual quarterly growth rate dropped significantly from Q1 when the UK economy expanded by 8.1% y/y.

The US PPI (Producer prices) dropped 0.5% compared to June while the June number was revised lower. Analyst expectation for the number was 0.2%. This was the first decline in the PPI in about 24 months. Lower fuel costs explained a lot of the decline (16.7% drop in the price of petrol). The cost of Diesel, gas, oilseeds, iron and steel scrap, and grains all moved lower. Annualized producer inflation dropped to 9.8%, the level is the lowest since October last year. 

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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 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 Prelim UoM Consumer Sentiment

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta

Chief Market Analyst

TIOmarkets.com

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