Daily Key points: US dollar plunges on slow CPI

The dollar index plunged below the 105 mark after yesterday’s softer than expected US inflation print. The annual inflation rate in the US slowed more than expected, with July’s reading of 8.5% yoy being below the 8.7% yoy market forecasts and marking the peak and the drop, from the 42-year high rate of June which was reported at 9.1% yoy. Compared to the previous month, the mom CPI slowed to stagnation levels being also lower than the forecasted rate of 0.2% mom. Should the prices have indeed reached their peak in June, then investors expect the Fed take their foot off the pedal when it comes to the pace as well as the magnitude of the upcoming rate hikes. Since the readings were both cooler-than-expected, the market rushed to reappraise the probabilities of the Fed’s future monetary policy. Yesterday prior to the release, we noted that the FFF assigned a 70% probability for a 75-basis points rate hike for September’s meeting. After the event, the probabilities tilted marginally in favor of a 50-basis points basis points rate hike reflecting the market’s sentiment shift towards the new data and the expectations for a slowdown of the Fed’s aggressive stance. Following the releases Minneapolis Fed President Kashkari stated that the Fed is “far, far away from declaring victory” on inflation, despite welcoming the positive news that inflation may have started to cool down. Other Fed officials have said they want to see months of evidence that prices are cooling, especially in the core inflation metric. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on 21st of September. On another note, US stock market indices, namely Nasdaq, S&P500 and Dow Jones all rallied strongly following the inflation print and the devaluation of the dollar edged them higher, dispelling any commentary that stocks are set to face headwinds. We would also like to highlight, the Weekly Initial Jobless claims figure today, which is set to increase to 263k compared to last week’s 260k figure and could weigh down on the dollar. Nonetheless, overall, the figure remains stable at relatively low levels, despite slight increase, since mid-April, indicating tightness in the US labour market.

USDIndex plunged below the 105 level yesterday following the cooler than expected inflation results. Given the break of the ascending trendline, the break below 105.10 (S1) support level but then followed by the quick rebound above the 105 level, we hold a sideways price action bias for its future price action, trading between 105.10 (S1) support and 106.82 (R1) resistance bounds. Below our 4H chart the RSI indicator registered the breach of the 30 oversold level and in our assessment the price action is due a correction towards the upside. Should the bull take over, we may see the price action breaking above the 106.82 (R1) line and move close to the 107.64 (R2) level. Should the bears reign over, we may see the 105.10 (S1) being broken definitively, followed by the break of the 104.46 (S2) level.

EUR/USD broke above the 1.0294 (R1) resistance line yesterday following the dollar’s weakness and earlier today we saw the retracement below the same level, gearing up for another test. We hold a bullish bias for the pair given the ascending trendline initiated on the 12 of July. Supporting our case is the RSI indicator which shows the positive momentum surrounding the pair. Should the buyers pile in, we may see the price extend upwards, breaking definitively the 1.0294 (R1) level and head for the 1.0437 (R2) level. Should sellers overwhelm, we may see the break below the ascending trendline, the break of the 1.0106 (S1) base and move near the 0.9951 (S2) support level.

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We would also like to point out OPEC’s Monthly report and from the US the final month on month PPI figure for July. Also in tomorrow’s Asian session we note the release of New Zealand’s Manufacturing PMI for July.

USDIndex H4 Chart