Week Ahead: Slowing inflation propels dollar sell-off

A recap of last week’s big news and price action with an analysis of what’s to come in the week ahead, including our chart of the week.

Forex Heat Map 

Source: MyFXBook

Weekly Recap

The big FX movers of the past week were NZDUSD, AUDUSD and USDCHF. 

Almost all major currencies saw significant gains vs the US dollar this week following palpable relief across markets that US inflation appears to have peaked. In theory, this gives room for the Federal Reserve to slow down or even end its series of large rate hikes.

Consumer price inflation (CPI) for the United States slowed in July to 0.0% m/m with yearly inflation dropping back to 8.5% from 8.7%. PPI, which measures prices out of the factory gate, surprisingly fell -0.5% m/m when expectations were for a 0.2% gain.

For the moment, markets are ignoring the comments of Fed policymakers themselves. The message has been relentlessly hawkish, suggesting a plan to keep raising rates until inflation which stands at 8.5% is heading back to the central bank’s target of 2%.

The dollar weakness helped gold extend its rally beyond $1800 per oz for the first time since July 5. Still the gains were muted by a rise in ‘real yields’ – a measure of bond yields adjusted for inflation. The higher the yield investors can receive on safe assets like US Treasuries, the less attractive it is to hold gold, which offers no yield.

Oil prices attempted to break lower but rebounded back into their former trading range amid economic optimism. The logic is a bit circular because the weaker oil prices led to inflation coming down and lower inflation is boosting economic confidence, which helped the price of oil rise. 

It was a strong week for Wall Street. The Nasdaq is now up 20% from its June low, taking it officially into a bull market, while the S&P 500 reached its highest since May. The weaker US inflation print helped accelerate a summer rally that had already gotten underway since mid-July. (NOTE: SP500 was last week’s ‘chart of the week’ – looking for the possibility of another bearish fake out if the price drops back under 4200.

Coming Up This Week

  • US retail sales

With the US dollar not doing so well compared to other currencies of late, retail sales will play a role in whether this trend can continue. A contraction in retail sales of 0.1% is predicted for July after a 1% surge in June. If US consumers can keep up spending in spite of the negative impact to their real incomes from inflation and interest rates growing, it will be another example of good news for the US economy after the positive July NFP data.

  • Walmart earnings

Another key metric that will give insight into how the US consumer is doing will be the Q2 earnings of retail giant Walmart. The stock experienced unusual volatility after management issued dire warnings alongside Q1 earnings. The share price has since stabilised, but could be at risk again if the guidance doesn’t improve.

  • UK data

The leadership race for the next Prime Minister has offered a bit of a distraction from the UK economic fundamentals. However this week, the UK releases both employment and inflation data. 

If UK inflation does not waver this week, Sterling could potentially strengthen in value against the US dollar. Analysts are expecting to see a year-over-year inflation rate of 9.3%, down from 9.4%, as well as a monthly reading of 0.7%, which would be a decrease from the previous month’s figure of 0.8%.

Technical Analysis

Our favourite technical chart of the week – USDJPY

Dollar-yen is approaching key support at 131.50 – formed by the May peak and the lows from June and August. The level serves as a potential neckline in a Head & Shoulders pattern.

If the neckline breaks, we can expect a trend reversal to carry the price significantly lower. However, if it holds it could act as a near term double bottom and a springboard for the next leg higher in the uptrend.

Economic Calendar

This is probably the last week to see any significant data before things slow down for the summer break. See the calendar below for the full schedule. 

Source: MyFXBook

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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