Outlook: We get PPI today alongside jobless claims, but both pale in comparison to yesterday’s worse-than-expected CPI. It puts the Fed in a bind. If it’s data-dependent, the next hike should be 100 bp. If it wants message consistency, it needs to stay at 75 bp. The airwaves are jammed with opinion on which it will be and why. One idea is that if it does 100 bp this time, it will be a bridge too far and the Fed will have to retreat faster, sooner next year. For the market to knee-jerk jump to the 100 bp conclusion is normal but still foolish, and to say the Bank of Canada led the way is simply not true–its decision came hours after the CPI release, and besides, the US tends not to copy Canada (no offense). See the CME FedWatch tool. The probability of a 100 bp hike has jumped to 82.1%--from zero on July 7. Several Fed funds watchers note that front-loading hikes this year removes the need for more next year. For June 2023, 31% see the rate rising only another 75 bp from 2.5-2.75% at year-end, or 100 bp up from today. A lesser percentage (27.6%) see rates up another 100 bp by mid-year. This embeds the idea that the Fed will over-tighten because it’s always behind the curve and will have to slow down dramatically next year. We enjoy scenario-building as much as the next guy, but honestly, we should listen to what the Fed claims is its priority list: first, kill inflation, even at the expense of the labor market. Second, maintain credibility and respect, even if at the expense of getting the forecasts wrong sometimes but sticking to its broad policy forward guidance unless absolutely forced to deviate. In a funny way, all the criticism of the Fed for getting it wrong is a tribute to the confidence even the critics do have in the Fed. How dare the Fed be mere mortals and misjudge data? One semi-surprise is the rise in services prices even as goods prices contract a bit. See the chart from BDSwiss. Goods prices slowing down is partly a function of supply chain blockages getting resolved (and remember China is still exporting heavily to the US). The next chart, from Deutsche Bank via The Daily Shot, shows supply-sensitive vs. demand sensitive prices, and the same primary inflation source–demand, not supply. Well, presumably hiking rates through the roof is going to moderate demand as unemployment rises. If it rises. This reliance on the Phillips curve–remember, Yellen warned against it–is going to be a big, fat worry and someday soon. If the labor market remains tight, it’s not clear demand is going to fade, even if a wage-price spiral is avoided. All this is fun, if you are an economist with no skin in the game. We see developments down the road, like price-gouging scandals, but more importantly, data on how the US is changing structurally post-pandemic and we see the outlines only vaguely. As noted before, demographics are still a bit of a mystery–over 10,000 Baby Boomers retiring every day while women are not returning to the labor force. If the labor shortage persists, and it can, the sectors that will have to raise wages include government, education, transportation and warehousing, and manufacturing. Bottom line, we are not sure the trade-off to be watching is demand for goods, which waxes and wanes sometimes quite independently of prices. Just because Amazon’s “prime day” offers deals doesn’t mean we feel an urgent demand for those goods. It seems obvious that if we respect the real yield differential rule as a key determinant (if not the only one) of currency fates, the CPI report buoyed up the dollar some more, especially against the stuck-in-the-mud yen and the soon-to-be-recessionary euro. (Sterling awaits a political outcome and new tax regime). The dollar is king and the euro is toast. Everyone says so. Ah, therein lies the problem. When everybody and his brother is talking about the dollar as the top currency, it’s time to doubt it. First of all, most of these dollar-cheerleaders know very little about currencies. They see a 1-2 linkage and quit. Secondly, upsetting surprises lurk everywhere, including the chain of economic and price developments arising from a strong dollar in the first place, like commodity prices that favor emerging markets. Sometimes we see results and sometimes not. China said it’s reconsidering Australian coal but the AUD fell anyway. And just try to put the price of oil and the CAD on the same chart–the correlation is often not even there, let alone strong. And yet falling oil prices affect US CPI and then monetary policy that bleeds over to Canada. It’s a matrix of multiple, sometimes conflicting signals, not a simple 1-2...

Outlook: We get PPI today alongside jobless claims, but both pale in comparison to yesterday’s worse-than-expected CPI. It puts the Fed in a bind. If it’s data-dependent, the next hike should be 100 bp. If it wants message consistency, it needs to stay at 75 bp. The airwaves are jammed with opinion on which it will be and why. One idea is that if it does 100 bp this time, it will be a bridge too far and the Fed will have to retreat faster, sooner next year. For the market to knee-jerk jump to the 100 bp conclusion is normal but still foolish, and to say the Bank of Canada led the way is simply not true–its decision came hours after the CPI release, and besides, the US tends not to copy Canada (no offense). See the CME FedWatch tool. The probability of a 100 bp hike has jumped to 82.1%--from zero on July 7. Several Fed funds watchers note that front-loading hikes this year removes the need for more next year. For June 2023, 31% see the rate rising only another 75 bp from 2.5-2.75% at year-end, or 100 bp up from today. A lesser percentage (27.6%) see rates up another 100 bp by mid-year. This embeds the idea that the Fed will over-tighten because it’s always behind the curve and will have to slow down dramatically next year. We enjoy scenario-building as much as the next guy, but honestly, we should listen to what the Fed claims is its priority list: first, kill inflation, even at the expense of the labor market. Second, maintain credibility and respect, even if at the expense of getting the forecasts wrong sometimes but sticking to its broad policy forward guidance unless absolutely forced to deviate. In a funny way, all the criticism of the Fed for getting it wrong is a tribute to the confidence even the critics do have in the Fed. How dare the Fed be mere mortals and misjudge data? One semi-surprise is the rise in services prices even as goods prices contract a bit. See the chart from BDSwiss. Goods prices slowing down is partly a function of supply chain blockages getting resolved (and remember China is still exporting heavily to the US). The next chart, from Deutsche Bank via The Daily Shot, shows supply-sensitive vs. demand sensitive prices, and the same primary inflation source–demand, not supply. Well, presumably hiking rates through the roof is going to moderate demand as unemployment rises. If it rises. This reliance on the Phillips curve–remember, Yellen warned against it–is going to be a big, fat worry and someday soon. If the labor market remains tight, it’s not clear demand is going to fade, even if a wage-price spiral is avoided. All this is fun, if you are an economist with no skin in the game. We see developments down the road, like price-gouging scandals, but more importantly, data on how the US is changing structurally post-pandemic and we see the outlines only vaguely. As noted before, demographics are still a bit of a mystery–over 10,000 Baby Boomers retiring every day while women are not returning to the labor force. If the labor shortage persists, and it can, the sectors that will have to raise wages include government, education, transportation and warehousing, and manufacturing. Bottom line, we are not sure the trade-off to be watching is demand for goods, which waxes and wanes sometimes quite independently of prices. Just because Amazon’s “prime day” offers deals doesn’t mean we feel an urgent demand for those goods. It seems obvious that if we respect the real yield differential rule as a key determinant (if not the only one) of currency fates, the CPI report buoyed up the dollar some more, especially against the stuck-in-the-mud yen and the soon-to-be-recessionary euro. (Sterling awaits a political outcome and new tax regime). The dollar is king and the euro is toast. Everyone says so. Ah, therein lies the problem. When everybody and his brother is talking about the dollar as the top currency, it’s time to doubt it. First of all, most of these dollar-cheerleaders know very little about currencies. They see a 1-2 linkage and quit. Secondly, upsetting surprises lurk everywhere, including the chain of economic and price developments arising from a strong dollar in the first place, like commodity prices that favor emerging markets. Sometimes we see results and sometimes not. China said it’s reconsidering Australian coal but the AUD fell anyway. And just try to put the price of oil and the CAD on the same chart–the correlation is often not even there, let alone strong. And yet falling oil prices affect US CPI and then monetary policy that bleeds over to Canada. It’s a matrix of multiple, sometimes conflicting signals, not a simple 1-2...

The US Dollar extended its run of gains against most currencies on Wednesday, this on the back of a hot US CPI read, which only adds more pressure on the Fed to be needing to do more with rate hikes.

The post-US CPI volatility triggered good two-way price moves around EUR/USD on Wednesday. The energy crisis in Europe continued weighing on the euro and capped the attempted recovery. Aggressive Fed rate hike bets, recession fears underpinned the USD and favour bearish traders. The EUR/USD pair witnessed good two-way price moves on Wednesday and was influenced by the intraday US dollar volatility that followed the release of the US consumer inflation figures. The US Labor Department reported that the headline US CPI rose 1.3% in June and the yearly rate accelerated from 8.6% in May to 9.1% - the highest level since November 1981. The readings were above expectations and sealed the case for another large interest rate hike by the Federal Reserve. Adding to this, Atlanta Fed President Raphael Bostic said that everything is in play to combat persistently rising inflation pressures. The markets were quick to react and started pricing in the possibility of a historic 100 bps Fed rate hike move later this month. This, in turn, lifted the USD to a fresh 20-year high and dragged the pair briefly below the parity mark for the first time since December 2002. The initial market reaction, however, fizzled out rather quickly. A typical "buy the rumour, sell the news" kind of trade triggered a sharp USD pullback and prompted some short-covering around the EUR/USD pair. Spot prices rallied around 125 pips from the daily low, though struggled to find acceptance above the 1.0100 round figure. Fears that a halt to gas flows from Russia could trigger an economic crisis in the Eurozone and curtail the European Central Bank’s ability to raise rates acted as a headwind for the shared currency. Apart from this, growing fears about a possible global recession continued lending support to the safe-haven greenback. This, in turn, kept a lid on any meaningful upside for the major and attracted fresh selling at higher levels. The overnight retracement slide extended through the Asian session on Thursday amid a fresh bout of USD buying interest. Market participants now look forward to the US economic docket - featuring the release of the Producer Price Index and the usual Weekly Initial Jobless Claims. This, along with the broader market risk sentiment, will influence the USD price dynamics and provide some impetus to the EUR/USD pair. The fundamental backdrop, however, remains tilted firmly in favour of bearish traders and suggests that any attempted recovery move might still be seen as a selling opportunity. Technical outlook From a technical perspective, the EUR/USD pair, so far, has struggled to register any meaningful recovery and the range-bound price action might still be categorized as a consolidation phase. Furthermore, the recent downfall over the past two-and-half weeks or so has been along a downward sloping channel. This further adds credence to the near-term negative outlook and supports prospects for an extension of the recent downward trajectory. Sustained weakness below the 1.000 psychological mark would reaffirm the bearish outlook and make the EUR/USD pair vulnerable. Spot prices could then accelerate the fall towards the 0.9915-0.9910 region en-route the next relevant support near the 0.9850-0.9845 zone. On the flip side, the 1.0100 round-figure mark, followed by the overnight swing high, around the 1.0120-1.0125 region might now act as immediate strong resistance. Any subsequent move up is more likely to confront stiff resistance near the 1.0275-1.0280 region ahead of the 1.0300 mark. Sustained strength beyond should lift the EUR/USD pair towards the 1.0350 support breakpoint, now turned resistance.

Europe European markets have seen another choppy and negative session after today’s US CPI report for June came in at sizzling hot 9.1%. The bigger than expected jump in inflation has raised the volume on the ever-growing drumbeat of recession, which is starting to make itself heard on a more audible basis. As has been the case globally, the surge was driven by higher food and energy prices, with US gasoline prices up almost 60% year on year. Today’s sell-off has been across the board with all sectors getting hit, with the best performers coming from commercial real estate as British Land and Land Securities claw back some of their losses from yesterday. The losses have been broad based, with IAG down after posting some decent gains yesterday, while the miners are also lower on weaker copper prices and rising global recession risks The Platinum Jubilee didn’t provide the pubs sector the boost that was originally envisaged if today’s Q4 numbers from JD Wetherspoon are any guide, with the shares slipping to their lowest levels since March 2020, after like for like sales fell by -0.4% over the same period as 2019. Despite getting permission to stay open longer over the bank holiday period, the pub chain said that it expects to post a full year loss of £30m. This was a sharp departure from an update in May when CEO Tim Martin said he expected to see a break-even outcome for profits in the current financial year, and that 2023 would see a return to relative normality. Today’s downgrade is due to higher costs in the form of higher spending on wages and maintenance, with repair costs in FY22 expected to come in at £99m compared to £76.9m in 2019. Lower than expected sales were probably a result of more people choosing the cheaper option of staying at home, celebrating with friends or at street parties.     US US markets opened sharply lower after today’s bigger than expected increase in US CPI in June, raising concerns that the Federal Reserve might be tempted to pull the trigger on a 100bps rate hike at the end of this month. While the headline number is grabbing all the headlines it is notable that core prices fell back from 6% to 5.9%, which could serve to temper any weakness after Europe closes for the day. With earnings season set to start in earnest tomorrow with the release of JPMorgan Chase Q2 numbers, investors are becoming increasingly concerned that the rising cost of living and inflation will prompt further revisions to its loan loss provisions. In Q1 the bank set aside $1.5bn in respect of this due to rising inflation risks. Back then CPI had been trending at just below 8%, and there were few if any who were predicting CPI at over 9%. Could we see further provisions as well as the potential for slowdowns in lending, whether it be in home loans or business. After rising sharply yesterday, Delta Airlines shares have dropped sharply after falling short of profit expectations in Q2. Profits came in at $1.44c a share, missing expectations of $1.64c a share, while revenues also came in short at $12.31bn. The airline cited higher operating costs for the profit miss and said that these higher costs were likely to persist throughout the rest of the year. FX The US dollar briefly jumped higher this afternoon after US CPI hit yet another 40-year peak of 9.1%, increasing the odds that the Federal Reserve might lean towards a more aggressive rate move at the end of this month. Not only has today’s number made the prospect of a 75bps rate hike much more likely, but it has also brought the prospect of a 100bps move into play, although markets appear to be in two minds about this given core prices fell to 5.9% in June. 100bps is what we saw from the Bank of Canada today after they decided to throw the kitchen sink at inflation by hiking rate by more than expected, by 100bps, from 1.5% to 2.5%, and going on to say that there was more to come.  This surprise announcement sent the Canadian dollar higher, although its gains have remained tempered by the stronger US dollar. The euro briefly dipped below parity to 0.9998 in the wake of the US CPI report, however there was little in the way of follow-through, despite more aggressive pricing about the Feds intentions on rates later this month.   The UK economy enjoyed a decent rebound in May, growing by 0.5%, while the April number was revised higher to -0.2%. Index of services expanded by 0.4% helped by a large rise in GP appointments, which offset the scaling back of NHS test and trace which weighed on the April numbers....

Europe European markets have seen another choppy and negative session after today’s US CPI report for June came in at sizzling hot 9.1%. The bigger than expected jump in inflation has raised the volume on the ever-growing drumbeat of recession, which is starting to make itself heard on a more audible basis. As has been the case globally, the surge was driven by higher food and energy prices, with US gasoline prices up almost 60% year on year. Today’s sell-off has been across the board with all sectors getting hit, with the best performers coming from commercial real estate as British Land and Land Securities claw back some of their losses from yesterday. The losses have been broad based, with IAG down after posting some decent gains yesterday, while the miners are also lower on weaker copper prices and rising global recession risks The Platinum Jubilee didn’t provide the pubs sector the boost that was originally envisaged if today’s Q4 numbers from JD Wetherspoon are any guide, with the shares slipping to their lowest levels since March 2020, after like for like sales fell by -0.4% over the same period as 2019. Despite getting permission to stay open longer over the bank holiday period, the pub chain said that it expects to post a full year loss of £30m. This was a sharp departure from an update in May when CEO Tim Martin said he expected to see a break-even outcome for profits in the current financial year, and that 2023 would see a return to relative normality. Today’s downgrade is due to higher costs in the form of higher spending on wages and maintenance, with repair costs in FY22 expected to come in at £99m compared to £76.9m in 2019. Lower than expected sales were probably a result of more people choosing the cheaper option of staying at home, celebrating with friends or at street parties.     US US markets opened sharply lower after today’s bigger than expected increase in US CPI in June, raising concerns that the Federal Reserve might be tempted to pull the trigger on a 100bps rate hike at the end of this month. While the headline number is grabbing all the headlines it is notable that core prices fell back from 6% to 5.9%, which could serve to temper any weakness after Europe closes for the day. With earnings season set to start in earnest tomorrow with the release of JPMorgan Chase Q2 numbers, investors are becoming increasingly concerned that the rising cost of living and inflation will prompt further revisions to its loan loss provisions. In Q1 the bank set aside $1.5bn in respect of this due to rising inflation risks. Back then CPI had been trending at just below 8%, and there were few if any who were predicting CPI at over 9%. Could we see further provisions as well as the potential for slowdowns in lending, whether it be in home loans or business. After rising sharply yesterday, Delta Airlines shares have dropped sharply after falling short of profit expectations in Q2. Profits came in at $1.44c a share, missing expectations of $1.64c a share, while revenues also came in short at $12.31bn. The airline cited higher operating costs for the profit miss and said that these higher costs were likely to persist throughout the rest of the year. FX The US dollar briefly jumped higher this afternoon after US CPI hit yet another 40-year peak of 9.1%, increasing the odds that the Federal Reserve might lean towards a more aggressive rate move at the end of this month. Not only has today’s number made the prospect of a 75bps rate hike much more likely, but it has also brought the prospect of a 100bps move into play, although markets appear to be in two minds about this given core prices fell to 5.9% in June. 100bps is what we saw from the Bank of Canada today after they decided to throw the kitchen sink at inflation by hiking rate by more than expected, by 100bps, from 1.5% to 2.5%, and going on to say that there was more to come.  This surprise announcement sent the Canadian dollar higher, although its gains have remained tempered by the stronger US dollar. The euro briefly dipped below parity to 0.9998 in the wake of the US CPI report, however there was little in the way of follow-through, despite more aggressive pricing about the Feds intentions on rates later this month.   The UK economy enjoyed a decent rebound in May, growing by 0.5%, while the April number was revised higher to -0.2%. Index of services expanded by 0.4% helped by a large rise in GP appointments, which offset the scaling back of NHS test and trace which weighed on the April numbers....

Australia is expected to have added 25K new jobs in June, below the previous 60.6K. Overheating inflation is still the main theme and the catalyst for risk-off movements. AUD/USD is under pressure and has major chances of a bearish breakout. Australia will report June employment data on Thursday, July 14. The country is expected to have added a modest 25K new jobs after gaining 60.6K in the previous month, while the Unemployment Rate is foreseen down to 3.8% from 3.9% in May. Ahead of the figures, Australia will also unveil July Consumer Inflation Expectations, with analysts expecting it at 5.9%, down from 6.7% previously. Employment and inflation As usual, the report will not include wage growth, which is released quarterly in the country around five weeks after the quarter ends. The latest Wage Price Index was the Q1 2022, which rose by 0.7% QoQ and 2.4% YoY, the highest annual rate recorded since December 2018, although still below the comfort RBA’s level at around 3%. Job creation and wage growth have been overshadowed by lingering inflation, not only in Australia. Generally speaking, central bankers’ function is to keep inflation in check at levels between 2% and 3%. So far, policymakers have failed miserably as the Consumer Price Index continues to rise in most global economies. US figures released on Wednesday were quite discouraging, as the CPI soared by 9.1% YoY, higher than anticipated. That means the Federal Reserve could become more aggressive and, therefore, drag other major central banks into tightening their policies. In this scenario, employment figures have lost the power to move the market unless the outcome diverges big from expectations. AUD/USD possible scenarios The AUD/USD pair trades near a 2-year low of 0.6710, as markets are in risk-off mode. A reading below expected will likely lead to a bearish breakout if it does not occur earlier. The pair is technically bearish, which adds to a potential downward extension scenario. Below the 0.6700 threshold, the pair will meet support at 0.6660 and 0.6620. A better-than-anticipated report could push the aussie higher, but sellers will likely return after the dust settles. The immediate resistance level is 0.6802, Wednesday’s daily high, followed by the 0.6870 price zone. 

AUD/USD Current Price: 0.6767 Australia will release the June employment report early on Thursday. The American dollar swung alongside the market’s sentiment after US CPI figures. AUD/USD has limited bullish potential in the near term, needs to clear 0.6810. The AUD/USD pair advanced for a second consecutive day, now trading around the 0.6760 level. The intraday direction depended on the greenback, which appreciated amid a bout of risk-aversion. The dismal mood was triggered by US inflation figures, as the headline Consumer Price Index reading soared by 9.1% YoY in June, a new 40-year high. Equities plunged with the numbers, weighing on the pair, later bouncing alongside Wall Street. Australia published July Westpac Consumer Confidence, which improved in July to -3% from -4.5% in the previous month. The country will report June employment data in the upcoming Asian session and is expected to have added a modest 25K new jobs after gaining 60.6K in the previous month, while the Unemployment Rate is foreseen down to 3.8% from 3.9% in May. Ahead of the figures, Australia will also unveil July Consumer Inflation Expectations, with analysts expecting it at 5.9%, down from 6.7% previously. AUD/USD short-term technical outlook From a technical point of view, the upside remains limited for AUD/USD. The daily chart shows that technical indicators turned marginally higher, although they are still below their midlines and lacking enough strength to confirm further advances. Meanwhile, moving averages maintain their bearish slopes above the current level, now hovering around 0.6870- The 4-hour chart shows that the pair is struggling around a mildly bearish 20 SMA, while the RSI indicator has already retreated within negative levels. The Momentum indicator, on the other hand, maintains its bullish slope above its midline. Bulls could have better chances if the pair clears the 0.6810 resistance level. Support levels 0.6710 0.6670 0.6625 Resistance levels: 0.6810 0.6850 0.6890 View Live Chart for the AUD/USD

AUD/USD Current Price: 0.6767 Australia will release the June employment report early on Thursday. The American dollar swung alongside the market’s sentiment after US CPI figures. AUD/USD has limited bullish potential in the near term, needs to clear 0.6810. The AUD/USD pair advanced for a second consecutive day, now trading around the 0.6760 level. The intraday direction depended on the greenback, which appreciated amid a bout of risk-aversion. The dismal mood was triggered by US inflation figures, as the headline Consumer Price Index reading soared by 9.1% YoY in June, a new 40-year high. Equities plunged with the numbers, weighing on the pair, later bouncing alongside Wall Street. Australia published July Westpac Consumer Confidence, which improved in July to -3% from -4.5% in the previous month. The country will report June employment data in the upcoming Asian session and is expected to have added a modest 25K new jobs after gaining 60.6K in the previous month, while the Unemployment Rate is foreseen down to 3.8% from 3.9% in May. Ahead of the figures, Australia will also unveil July Consumer Inflation Expectations, with analysts expecting it at 5.9%, down from 6.7% previously. AUD/USD short-term technical outlook From a technical point of view, the upside remains limited for AUD/USD. The daily chart shows that technical indicators turned marginally higher, although they are still below their midlines and lacking enough strength to confirm further advances. Meanwhile, moving averages maintain their bearish slopes above the current level, now hovering around 0.6870- The 4-hour chart shows that the pair is struggling around a mildly bearish 20 SMA, while the RSI indicator has already retreated within negative levels. The Momentum indicator, on the other hand, maintains its bullish slope above its midline. Bulls could have better chances if the pair clears the 0.6810 resistance level. Support levels 0.6710 0.6670 0.6625 Resistance levels: 0.6810 0.6850 0.6890 View Live Chart for the AUD/USD

Annual CPI in the US is forecast to rise to 8.8% in June. Markets are not sure about the size of the Fed's September rate hike. Core inflation is set to edge lower on falling crude oil prices.  The relentless US dollar rally extends further ahead of the highly-anticipated inflation data from the US. The US Dollar Index (DXY), which tracks the greenback’s performance against a basket of six major currencies, is already up more than 3% in July amid growing fears of the global economy tipping into recession. The US Bureau of Labor Statistics is expected to report that the Consumer Price Index (CPI) rose to a fresh multi-decade high of 8.8% on a yearly basis in June from 8.6% in May. The Core CPI, which excludes volatile food and energy prices, is forecast to decline to 5.8% from 6%. Crude oil prices fell sharply in June, suggesting that it wouldn’t be surprising to see a retreat in core inflation. After having posted gains for six straight months, the barrel of West Texas Intermediate (WTI) lost more than 8% in June. US annual CPI chart Market implications The US dollar remains the go-to safe-haven asset as the US Federal Reserve remains on track to continue to tighten its policy with the US economy remaining relatively healthy. The US central bank is widely expected to hike its policy rate by 75 basis points (bps) in July and several FOMC policymakers, including Chairman Jerome Powell, voiced their willingness to do so. Investors, however, are not certain about the size of the September rate increase. After the monthly jobs report showed that Nonfarm Payrolls in the US rose more than expected in June, the probability of one more 75 bps hike in July jumped to 30% from 15%, according to the CME Group’s FedWatch Tool. Hence, a hot inflation report could trigger a similar reaction and help the dollar preserve its strength against its rivals. On the other hand, an annual CPI print in line with the market consensus could cause a “buy the rumor, sell the fact” market action. White House Press Secretary Karine Jean-Pierre told reporters on Monday that she expects new CPI data to be “highly elevated.” Additionally, the Relative Strength Index (RSI) indicator on the daily DXY chart holds above 70, suggesting the index is overbought and that it could stage a technical correction before continuing its rally. The last time when the daily RSI climbed above 70 in late April, DXY lost more than 1% before resuming its uptrend. Unless CPI figures surpass analysts’ estimates, investors could take the opportunity to book their profits and cause the dollar to weaken. DXY daily chart An unexpected decline in annual CPI could cause market participants to reassess the Fed’s rate outlook and open the door for a USD selloff. Furthermore, a lower-than-expected print could also have a positive impact on market mood and cause the bearish pressure on the greenback to increase. With the Fed going into its blackout period on July 16, investors might refrain from betting on further dollar strength, and DXY could stay in a consolidation phase until the Fed’s policy announcements on July 27. 

Annual CPI in the US is forecast to rise to 8.8% in June. Markets are not sure about the size of the Fed's September rate hike. Core inflation is set to edge lower on falling crude oil prices.  The relentless US dollar rally extends further ahead of the highly-anticipated inflation data from the US. The US Dollar Index (DXY), which tracks the greenback’s performance against a basket of six major currencies, is already up more than 3% in July amid growing fears of the global economy tipping into recession. The US Bureau of Labor Statistics is expected to report that the Consumer Price Index (CPI) rose to a fresh multi-decade high of 8.8% on a yearly basis in June from 8.6% in May. The Core CPI, which excludes volatile food and energy prices, is forecast to decline to 5.8% from 6%. Crude oil prices fell sharply in June, suggesting that it wouldn’t be surprising to see a retreat in core inflation. After having posted gains for six straight months, the barrel of West Texas Intermediate (WTI) lost more than 8% in June. US annual CPI chart Market implications The US dollar remains the go-to safe-haven asset as the US Federal Reserve remains on track to continue to tighten its policy with the US economy remaining relatively healthy. The US central bank is widely expected to hike its policy rate by 75 basis points (bps) in July and several FOMC policymakers, including Chairman Jerome Powell, voiced their willingness to do so. Investors, however, are not certain about the size of the September rate increase. After the monthly jobs report showed that Nonfarm Payrolls in the US rose more than expected in June, the probability of one more 75 bps hike in July jumped to 30% from 15%, according to the CME Group’s FedWatch Tool. Hence, a hot inflation report could trigger a similar reaction and help the dollar preserve its strength against its rivals. On the other hand, an annual CPI print in line with the market consensus could cause a “buy the rumor, sell the fact” market action. White House Press Secretary Karine Jean-Pierre told reporters on Monday that she expects new CPI data to be “highly elevated.” Additionally, the Relative Strength Index (RSI) indicator on the daily DXY chart holds above 70, suggesting the index is overbought and that it could stage a technical correction before continuing its rally. The last time when the daily RSI climbed above 70 in late April, DXY lost more than 1% before resuming its uptrend. Unless CPI figures surpass analysts’ estimates, investors could take the opportunity to book their profits and cause the dollar to weaken. DXY daily chart An unexpected decline in annual CPI could cause market participants to reassess the Fed’s rate outlook and open the door for a USD selloff. Furthermore, a lower-than-expected print could also have a positive impact on market mood and cause the bearish pressure on the greenback to increase. With the Fed going into its blackout period on July 16, investors might refrain from betting on further dollar strength, and DXY could stay in a consolidation phase until the Fed’s policy announcements on July 27. 

Annual CPI in the US is forecast to rise to 8.8% in June. Markets are not sure about the size of the Fed's September rate hike. Core inflation is set to edge lower on falling crude oil prices.  The relentless US dollar rally extends further ahead of the highly-anticipated inflation data from the US. The US Dollar Index (DXY), which tracks the greenback’s performance against a basket of six major currencies, is already up more than 3% in July amid growing fears of the global economy tipping into recession. The US Bureau of Labor Statistics is expected to report that the Consumer Price Index (CPI) rose to a fresh multi-decade high of 8.8% on a yearly basis in June from 8.6% in May. The Core CPI, which excludes volatile food and energy prices, is forecast to decline to 5.8% from 6%. Crude oil prices fell sharply in June, suggesting that it wouldn’t be surprising to see a retreat in core inflation. After having posted gains for six straight months, the barrel of West Texas Intermediate (WTI) lost more than 8% in June. US annual CPI chart Market implications The US dollar remains the go-to safe-haven asset as the US Federal Reserve remains on track to continue to tighten its policy with the US economy remaining relatively healthy. The US central bank is widely expected to hike its policy rate by 75 basis points (bps) in July and several FOMC policymakers, including Chairman Jerome Powell, voiced their willingness to do so. Investors, however, are not certain about the size of the September rate increase. After the monthly jobs report showed that Nonfarm Payrolls in the US rose more than expected in June, the probability of one more 75 bps hike in July jumped to 30% from 15%, according to the CME Group’s FedWatch Tool. Hence, a hot inflation report could trigger a similar reaction and help the dollar preserve its strength against its rivals. On the other hand, an annual CPI print in line with the market consensus could cause a “buy the rumor, sell the fact” market action. White House Press Secretary Karine Jean-Pierre told reporters on Monday that she expects new CPI data to be “highly elevated.” Additionally, the Relative Strength Index (RSI) indicator on the daily DXY chart holds above 70, suggesting the index is overbought and that it could stage a technical correction before continuing its rally. The last time when the daily RSI climbed above 70 in late April, DXY lost more than 1% before resuming its uptrend. Unless CPI figures surpass analysts’ estimates, investors could take the opportunity to book their profits and cause the dollar to weaken. DXY daily chart An unexpected decline in annual CPI could cause market participants to reassess the Fed’s rate outlook and open the door for a USD selloff. Furthermore, a lower-than-expected print could also have a positive impact on market mood and cause the bearish pressure on the greenback to increase. With the Fed going into its blackout period on July 16, investors might refrain from betting on further dollar strength, and DXY could stay in a consolidation phase until the Fed’s policy announcements on July 27.