The US dollar has stalled at the 50% retracement of the swing high printed on the 5th May 2021 to the swing low printed earlier this week. The run-up to the $90.70 level was on the back of a higher-than-expected CPI reading from the US yesterday. As the US dollar appreciated after the news the EURUSD and GBPUSD fell but in each case, no technical damage has been done to their respective uptrends.
The ActivTrades sentiment indicator for the EURUSD and GBPUSD have traders equally biased towards the single currency and pound. With 65% of traders feeling the US dollar will continue to appreciate against these crosses.
The Federal Reserve will meet again next week, and the markets will be anticipating a lot of commentary around the rising inflation. However, Fed Chair Powell has more than once reiterated that the Fed will need to see ‘substantial progress’ and more than one data print above 2%. Yesterday’s headline figure was 4.2% with Core CPI which excludes the highly volatile Food and Energy components rising to 3%.
In the chart above I have compared the CPI readings of the USA with China, as the two economic powerhouses tend to follow each other. The US has clearly moved several deviations higher than China and this could indicate a snapback in CPI readings when things normalise with regards to COVID-19 disruptions.
The Fed’s preferred inflation metric Personal Consumption Expenditures (PCE) is also likely to rise above the target rate.
In the last PCE reading for the month of March, the rise in expenditure has largely reflected an increase in government social benefits, games, toys, hobbies, motor vehicles and parts, food and accommodation. All of which increased due to the stay-at-home restrictions, bottlenecks in manufacturing and distribution due to the pandemic. These items were all higher in yesterday’s CPI reading so there is a consensus between the non-government that the Fed will have to step in early with rate hikes, whereas the government and the Fed see this as transitory. If the worry is in having too much inflation, the data would show that during times when demand strips supply, if the Fed were to raise interest rates this would increase the costs of all goods and services and would exacerbate the rise in price inflation. Which in itself is not a bad thing if wages increase to keep up. The Fed has also stated that they need to see evidence of employment coming back towards full employment levels before they move monetary policy, so today, Initial Jobless claims data will be a pivotal point in the day’s trading action.
Equities fell to multi-week lows in the US and this carried on into the Asia-Pac session with the Nikkei 225 sheading 2000 points (-2.0), with the Australian ASX200 dropping -0.8% as did the Shangai Comp.
The USDJPY closed yesterday at the day’s highs with USD strength and JPY crosses trading relatively flat despite the risk aversion, but this morning’s price action in the greenback has put a pause to further appreciation in prices. The technical analysis says the currency pair is now in an uptrend as we have higher swing highs and a higher swing low, so downside risk is when the USDJPY closes below 108.35 but the upside potential is that we trade back to 110.00-111.00 and take out the years high.
The ActivTrader sentiment indicator shows that traders using the platform are still not particularly biased in the overall direction of the USDJPY but 55% of them remain bearish.
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