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USDEURGold

The Weekly Close Out

Aug 12, 2022
The peak inflation narrative is alive and well. Today's uMich consumer inflation expectations will be the key data point on this topic as the week draws to a close. Read below to find out more.

Dollar Index (DXY):

It’s been a tough week at the office for the greenback as the peak inflation narrative and consequently the less aggressive Fed creates the idea of a Goldilocks scenario, which is weighing on USD’s former bullish trend. The NY Fed’s survey of consumer inflation expectations got the ball rolling at the beginning of the week with the 5-year period showing a decline from 2.8% to 2.3%. However, wage pressures continue to remain sticky and show no signs of slowing as the unit labour costs report indicated on Tuesday with a print of 10.8% QoQ vs 9.5% expected. The main event globally this week was the US inflation data for July, which provided risk assets with a boost (VIX dropped below 20 level for first time since April 2021) and the dollar with the sell button. The market had become so used to upside surprises that this downside surprise was a bit of a shock. Headline printed at 8.5% YoY vs exp of 8.7% and the previous month of 9.1%. I think what also boosted sentiment was the miss on core too.

There was talk of a 100bps hike and potentially even an inter-meeting hike, but now that’s been quashed and even the near 80% chance of a 75bps hike has been scaled back with a 63.5% chance of a 50bps hike now on the cards. I would caution about waving the inflation victory flag just yet, as shelter & rent, general services and wage pressures remain very strong. The main factor cooling price pressures was the slump in energy prices, particularly gasoline. Used car, hotel and airfare prices also took some heat out of the numbers. Also, the Fed wants to see more than just one month’s worth of price pressures abating. To put it in perspective of how entrenched and elevated inflation is, if CPI prints at 0% MoM until the end of the year, inflation will still be at 6.2%.

Despite the dovish pivot and less aggressive rate path by the Fed being latched onto by the market, we got robust pushback from three FOMC members this week. The Fed’s Evans was first up as he stated that inflation was unacceptably high and that he expects rate hikes this year and next. He sees the fed funds rate at 3.25%-3.5% by the end of this year and 3.75%-4% by the end of 2023. That would mean an additional 100bps of hikes over the remaining three meetings (priced by the market).

Later in the session, President Kashkari (normally the most dovish member) reitared the trope that the Fed is far away from declaring victory on inflation and took rate expectations a step further, saying he saw a 3.9% fed funds rate by the end of this year and a 4.4% rate by the end of 2023. To hammer home the point on rate cuts, Kashkari called the idea of cuts early next year unrealistic and said the more realistic path was to raise rates and keep them there until inflation is well on its way to 2%. There is a big divergence between the market and the Fed’s expectation of where rates will be. One of those camps are wrong. Adding fuel to the inflation has peaked fire was the -0.5% PPI print for July (biggest drop since April 2020) and far below the 0.2% expected. Initial jobless claims were better than expected and the previous month’s number was revised lower. Still benefit claims are on an upward trajectory and needs to be observed regularly. Could today’s uMich consumer inflation expectations follow the NY Fed’s survey in showing a decline. The 5-year period is the most important for the Fed. This is a risk event for the market as the week comes to a close.

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(Source: Tradingview - Past performance is not indicative of future performance.)

DXY has been sent below its 50-day SMA. The RSI seems to be indicating mini divergence as price makes a lower low and the RSI makes a higher low. The bulls will need to reclaim the 50-day SMA if they are to stop this downtrend move in its tracks. Targets on the upside and downside are 105.5 (21-day EMA just above) and the 104.2 lows respectively.

EURUSD:

The economic calendar has been as barren as can be for the eurozone. Price has been taking direction from happenings across the Atlantic and gas flow related news. Dollar weakness has been exploited by euro bulls. Gas prices in the EU have been soaring, yet EURUSD has shrugged this off. The terms of trade shock has been massive. The BTP-Bund spread has been on a narrowing path which is one plus for the common currency. The repricing in rates markets post CPI helped narrow the spread between the EU and US, providing a tailwind for EURUSD.

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(Source: Tradingview - Past performance is not indicative of future performance.)

EURUSD has broken through overhead resistance at 1.027, but the 50-day SMA was too much for buyers to overcome. 1.036 and 1.04 are the key levels on the upside, while 1.025 on the downside warrants monitoring. The RSI remains above the 50 level, indicating a uptrend bias. There is a downtrend line I’ve drawn in place too for the bulls to break above.

GBPUSD:

Given another barren economic calendar there hasn’t been much happening in pound land. We did get some Brexit related news in terms of the UK being given an extra month to respond to infringement proceedings as a result of a failure to implement the NI Protocol. News hit the wires that the UK is planning under a worst case scenario for power cuts to industry and homes in January. The pound wasn’t too happy to hear this . I left South Africa almost 2-years ago, but I can’t seem to escape loadshedding. Chief Economist at the BoE, Huw Pill, did an online Q&A session on Wednesday. Nothing of any substance could be extracted.

UK Q2 GDP data came in marginally better than expected (-0.1% vs -0.2%), it was driven by a drop in manufacturing and services. Cable is lower, but there is also some dollar strength causing this. I’d say this should keep the BoE on track to hike by 50bps in September. Not that this seems to be helping the ailing pound as very dire economic forecasts are predicted. Widespread strikes is another factor weighing on sterling.

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(Source: Tradingview - Past performance is not indicative of future performance.)

If GBPUSD can hold the mini uptrend line, then bulls should remain in control. Price is right on the 50-day SMA currently and this could act as support. The RSI once again couldn’t overcome the 60.44 resistance level and this is key for pushes beyond 1.227. On the downside 1.20 is pivotal.

USDJPY:

Dollar yen has had no idiosyncratic factors driving the pair, however, volatility has still been present given the moves in the US 10-year yield. It seems that the peak for USDJPY has occurred, unless we see a big reversal by the market pushing 10-year yields higher once again. Catalysts wise I see this as a lower probability opportunity. With the US 10-year yield eyeing the 50-day SMA at roughly the 3% level, USDJPY is one to watch. uMich inflation data may see a sizeable move into the weekend. Price is bouncing from oversold levels but remains below the 50-day SMA. The 21-day EMA has crossed below the 50-day SMA, which is short term negative. The RSI remains below 50, indicating a downtrend bias. On the downside, 132 is a key level. Moves to the upside would likely find some sellers closer to 135.

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(Source: Tradingview - Past performance is not indicative of future performance.)

Gold:

Gold had a solid start to the week as it recovered its 50-day SMA and pushed above the key psychological resistance of $1800. This was largely the result of a weaker dollar. The precious metal has been juxtaposed as it tries to decide whether to regain its former label as an inflation hedge or follow the path of real yields. As the market doubts the Fed’s hawkish path and reprices how restrictive they’ll act, longer-term growth prospects have been pushing up US 10-year yields and with lower inflation expectations this has led to a higher real yield. Kryptonite for gold. A bit of late week dollar strength is also providing another headwind. Today’s uMich inflation print could see some further movement. Price is now just above its 50-day SMA, which if breached could see another move towards $1775 support. $1800 is clearly the level on the upside. The RSI rolled over as it hit key resistance at 62.8.

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(Source: Tradingview - Past performance is not indicative of future performance.)

Crude Oil:

Crude has found its feet after looking precarious as it plumbed the $95 level. A weaker dollar and stronger risk sentiment as seen by the equity market has helped propel the black liquid higher. A pipe suspension through Ukraine of Russian oil also helped provide a temporary boost to price earlier in the week. Reports have also come out that given the surging European gas prices that Germany are substitute switching to oil at some of their industrial company manufacturing hubs. The EU have finalized the text of the Iranian Nuclear deal and all that is required now is a sign off by the US and Iran, which could occur within weeks. Inventory data out from the US showed a significant build vs a small drawdown expected. IEA released a report indicating that they believe OPEC will struggle to push out further supply and upgraded their demand consumption forecasts. Another driver of recent strength is the less hawkish Fed, who now may just achieve their soft landing and this will lead to less demand destruction within the commodities complex.

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(Source: Tradingview - Past performance is not indicative of future performance.)

Crude is finding resistance at the 21-day EMA. On the upside the round number of $105 would be a magnet for bulls while $100 back at range support and the 200-day SMA would be absolutely key. The RSI remains below 50, so a downtrend bias remains in place.

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