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Traders to focus on inflation again

The probabilities for a 75 bp hike by the Fed in September shot up to 70.5% after the super-strong employment report from the US on Friday.  The report forced traders to focus on inflation once again. The bond markets had priced in more recession than inflation and thus had to reverse. The yields rallied and pushed the dollar higher as the strong NFP number together with an uptick in earnings indicates the Fed will remain aggressive. The economic calendar is fairly thin today and tomorrow but on Wednesday we get this week’s main risk event, the US CPI release. This keeps the markets interesting this week too and will provide intraday traders with great trading opportunities. Therefore you might want to consider topping up your account with trading funds so that you are ready for action when opportunities arise. If you don’t have an account with us yet register here for free! 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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Due to the dollar connection and herd mentality among the fund managers (it’s okay to be wrong with the crowd but not alone) the markets are fairly well correlated. Some markets are positively correlated while others are negatively correlated and the level of correlation varies over time. However, often when there’s a major turning point in the treasury bond market and the dollar, we see currencies, commodities and equities turning as well. Friday’s ultra-strong jobs report created a wave of selling in the T-bond market pushing the yields and the dollar higher. Let’s take a look at some of the markets to see how much of an impact the NFP numbers had on them and where the key technical levels are. 

In today’s report, I provide you with trade ideas, analysis and key technical levels on:


USDJPY chart 08 08

USDJPY rallied substantially and is trading to the 135.58 resistance. The market is bullish above 134.43. Alternatively, if the 134.43 is violated decisively the market could slip down to 133.80. 

Due to the differences between the Fed and BOJ rate policies, the Rate-sensitive USDJPY is a big mover when we get market-moving news. On Friday, the pair rallied over 200 pips as traders were surprised and had to reposition themselves. Now we have a clear upward trend in the USDJPY pair and should, therefore (based on both fundamentals and technicals) look for long trades in this market.  The market is approaching a resistance soon which is a risk factor (could attract profit taking and create pull-back). However, in uptrends, the resistance levels are violated sooner or later. As a rule, I look to buy at support levels in uptrends as they provide the best reward vs. the risk. 

EURJPY chart 08 08

EURJPY was another strong mover on Friday. The market is now trending higher but just like USDJPY, it’s approaching a resistance level at 138.12. The market is bullish above 137.28. Alternatively, if the 137.28 level doesn’t provide support the market is likely to trade down to the 136.55 – 136.80 range. 

Gold chart 08 08

XAUUSD lost a lot of momentum after hitting my medium-term target area. Also, on Friday gold dropped fast as the NFP came in so strong. The market is short-term bullish though if it can stay above the support provided by the channel low (currently at 1768). Alternatively, if the 1768 level is broken decisively the market is likely to test the 1754 support. 

Gold bulls don’t like the idea of higher yields that are the likely outcome of more aggressive Fed rate hikes. However, at the same time, the situation in Taiwan worries investors and they might divert money into gold if China increases its show of strength around Taiwan. 

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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