Easing of inflationary pressures weighs on USD

The USD was on the retreat across the board yesterday against its counterparts, as the US inflation report for June came in cooler than expected. It’s characteristic that the headline rate slowed down beyond market expectations reaching 3.0%yoy if compared to May’s 3.3%yoy, while prices even contracted on a month-on-month level. On a core level, inflation ticked down enhancing the signal of easing inflationary pressures in the US economy. Please note that the release tends to increase the pressure on the Fed to start cutting rates. The weakening of the USD was especially felt against the JPY, with market participants even suspecting the possibility of a covered market intervention operation by Japan to enhance the strengthening of JPY against the USD. We may see the volatility for JPY pairs being extended today and on Monday, if BoJ’s FX targets have not been met, or if the JPY weakens extensively again. The easing of inflationary pressures in the US economy had ripple effects beyond the FX market, as expected in yesterday’s report, as gold prices gained substantially from the weakening of the USD. Today we get the US PPI rates for June, which are expected to accelerate and if actually so, we may see the losses of the greenback being clipped as it would contradict the slowdown of the CPI rates for the same month. USD/JPY tumbled yesterday breaking the 160.35 (R1) support line, now turned to resistance and continued to move lower to test the 157.75 (S1) support level, before correcting higher. Given that the pair has not breached the lower boundary of the upward channel guiding it since the beginning of the year and even has corrected a bit higher we tend to maintain a bias for a sideways motion to prevail. Furthermore we note that the RSI indicator dropped from 70 to just below 50, in a sign that the market’s bullishness has been erased, yet has still to drop lower to indicate the build-up of a bearish sentiment. Should the bears take over, we may see the pair breaking the 157.75 (S1) support line and aiming for the 154.60 (S2) support base. Should the bulls take over, we may see USD/JPY, regaining yesterday’s losses by breaking the 160.35 (R1) resistance line and taking aim of the 163.00 (R2) resistance level.

During Monday’s Asian session, we highlight the release of China’s GDP rate for Q2. The rate is expected to slow down and reach 5.1% yoy if compared to Q1’s 5.3% yoy and if actually so the release could be indicative of the problems faced by the Chinese economy in its effort to recover. It should be noted that also China’s urban investment, retail sales and industrial output growth rates for June are to be released at the same time and are also expected to slow down and if so could weigh on the market sentiment, turning it more cautious. Hence, we highlight the possibility of the release also weighing on the Aussie given the close Sino-Australian ties and the exports of Australian raw materials to China.

AUD/USD edged higher yesterday, placing some distance between its price action and the 0.6715 (S1) support line. We tend to remain bullish for the pair, despite the slow progress and tend to maintain this outlook as long as the upward trendline incepted since the 4 of July. The RSI indicator is near the reading of 70 implying a strong bullish sentiment that may fuel the pairs’ ascent higher. On the other hand, we note that he pair’s price action is flirting with the upper Bollinger band, which may imply also a strong bullish sentiment, yet also underscores the possibility for a correction lower. Should the buying interest be maintained we may see AUD/USD continuing to aim for the 0.6870 (R1) resistance line. Yet the upward movement seems fragile and should sellers take over, we may see the pair breaking the prementioned upward trendline, the 0.6715 (S1) support line and take aim for the 0.6575 (S2) support level.

Other highlights for the day

During the European session today, we get Sweden’s CPI rates for June and France’s final HICP rate also for June. In the American session, we get from the US also the preliminary University of Michigan consumer sentiment for July as well as Canada’s Building Permits for May.