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Dollar: Can US CPI Break Greenback’s Technical Boundaries?

Dollar: Can US CPI Break Greenback’s Technical Boundaries?

2014-07-22 04:11:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar: Can US CPI Break Greenback’s Technical Boundaries?
  • Euro Markets Cooling and Periphery Bonds Rising is Unusual
  • British Pound at Mercy of Yields as Event Risk Approaches

Dollar: Can US CPI Break Greenback’s Technical Boundaries?

The Dow Jones FXCM Dollar Index (ticker = USDollar) was nudged higher this past session, but the move clearly lacked the belief we would expect from a commitment from bulls. Similar hesitation is seen from EURUSD at 1.3500, GBPUSD at 1.7000 and AUDUSD above 0.9300. While these pairs have some relationship to the ‘reach for yield’ theme, the greenback is a safe haven for liquidity – a higher order of fear. These same pairs can also develop material trend through the adjustment of US interest rate expectations. This is a much more willing fundamental driver through the immediate future with a key monetary policy pressure point due this session. The June Consumer Price Index (CPI) statistics are due at 12:30 GMT and the consensus is for the annual pace to maintain its 2.1 percent clip while the core reading maintains 2.0. If the Fed is to hike, it will be on the basis of price pressures. A substantial deviation may be needed though with the Fed, NFPs and GDP next week.

Euro Markets Cooling and Periphery Bonds Rising is Unusual

Far less resistant to sentiment tides, the Yen crosses have more readily followed equities into their retreat. This pullback has exacerbated some existing moves and subsequently led to provocative technical breakdowns. EURJPY dropped below 137.50 and has progressed to its lowest level in five months. NZDJPY accelerated a three-day, nearly 2 percent tumble that has tentatively broken a two-year rising trendline. Unlike the dollar where its appeal really kicks in when demand for market depth is tantamount, the Japanese currency finds a bid well before that extreme as the market looks to first unwind risky positions before proactively seeking out the havens. As a funding currency driven down by a BoJ that has capped its stimulus effort and a risk drive that is facing low returns, these crosses are far more exposed.

British Pound at Mercy of Yields as Event Risk Approaches

The Cable illustrates the pound’s concern ably enough. The benchmark pair stands just above 1.7050 and the backbone of this past year’s bull trend. A four-day decline (with Monday’s close) presents the pair’s worst run in three months. The next significant step is likely to decide a ‘break’ for bears or revival of the long-standing trend. The sterling has experienced a very strong run on the basis of a hawkish rate forecast – realizing a hike before its major counterparts and seeing a pace that keeps that premium thereafter. How much premium should this view afford the currency? Are we full pricing the hawkish view or has the reach for yield pushed us beyond the objective parameters? Looking at the two-year Gilt yield and 1-year-2-year swap suggests it may be stretched. Watch 0.80 and 2.05 for the two respectively – and 1.70 for GBPUSD.

Australian Dollar: What Happens if CPI Stokes Rate Forecasts?

Next to the US inflation readings, the next most prominent round of event risk for the upcoming session is Australia’s own consumer inflation statistics for the second quarter. The contrast in performance between the Aussie and Kiwi dollar’s over the past few years illustrates the latter’s greatest shortfall: a carry currency that has suffered from an utter lack of hawkish rate expectations. Over the past six months, the expectations for further cuts have been shed. Yet, the jump to hike forecasts has yet to be made. When a key fundamental characteristic is fully underappreciated as carry interest is for the Aussie, there is tremendous potential. But, something substantial is needed to rouse bulls from recent years of cuts and a preoccupation with the connection between Australia and China. An upside CPI surprise could accomplish that.

New Zealand Dollar Stabilizes as Market Sets Hawkish View for RBNZ

The estimates are starting to roll in for the RBNZ rate decision from economists. Last week, the Kiwi dollar suffered a hefty stumble when the country’s 2Q CPI reading printed a weaker-than-expected 1.6 percent annual pace. This is well below the RBNZ’s 2 to 3 percent target and we are already three rate hikes into the central bank’s new regime. Is there enough justification in data and forecasts to keep such a steady pace of tightening – especially when its global counterparts have yet to move? The Bloomberg economist forecast shows 14 of 15 believe another 25 bp hike to 3.50 percent is in store. NZDUSD, meanwhile, is 160 pips off last week’s highs.

Emerging Markets Still Led by Russian Ruble Struggle

The MSCI Emerging Market ETF extended its Friday rebound – pushing the measure back to 17-month highs without committing to reviving the gradual bull trend of the past months. Complacency is currently have a far more productive influence on this market category than even the S&P 500. In fact, the one-month (20 trading day) correlation between the VIX Volatility Index and ETF is 0.81 – strongly positive. Progress for further volatility deflation is naturally limited though. What does that mean for this asset class? Meanwhile, the EM currencies were a mixed bag for the day – and general retrained with the amplitude of their moves. Gains versus the dollar were measured by the South African Rand, Turkish Lira and Brazilian Real. The day’s worst performer was the Russian Ruble – extending its decline following the Flight MH17 incident.

Gold Consolidates Before Market Weighs its Inflation Hedge Appeal

Gold barely budged this past session. The 0.1 percent advance in spot further carved out a diminishing range that has carried over from last week. Taken in conjunction with the proper spark for encouragement, this is generally the formula for a meaningful breakout. Yet, we need an effective catalyst to graduate this potential into realized price swings. The US inflation statistics dead ahead will utilize one of the commodity’s primary fundamental themes – though it also happens to be its weakest. Gold’s appeal as an inflation hedge is severely diminished by global measures of exceptionally weak price pressures. The IMF’s measure of world inflation stood at 3.4 percent – well below the pace that preceded the 2008 bull trend ignition. Furthermore, if US inflation surprises, it will also impact the dollar…a potential impact curb.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

2:00

CNY

Conference Board Leading Economic Index (JUN)

Measures change in certain economic sectors like consumer confidence, export orders and total loans issued.

4:30

JPY

All Industry Activity Index (MoM) (MAY)

0.6%

-4.3%

Measures economic activity in the Japanese market, important guide to macroeconomic sentiments like consumer confidence, industrial production, etc

5:00

JPY

Supermarket Sales (YoY) (JUN)

-2.2%

5:00

JPY

Leading Index (MAY F)

105.7

5:00

JPY

Coincident Index (MAY F)

111.1

6:00

CHF

Trade Balance (Swiss franc) (JUN)

2.77B

Greater than expected trade deficits are bad for the value of the corresponding currency as the government is expected to cover the deficit by issuing more debt

6:00

CHF

Exports (MoM) (JUN)

-5.0%

6:00

CHF

Imports (MoM) (JUN)

-2.5%

7:00

JPY

Convenience Store Sales (YoY) (JUN)

-0.8%

Measures consumer activity, currently an important mandate of the Bank of Japan

8:30

GBP

Public Finances (PSNCR) (Pounds) (JUN)

8.5B

Measures the balance between spending and earning of the government. Government must issue debt if spending exceeds earnings, which is usually negative for its nation’s currency.

8:30

GBP

Public Finances (NCR) (Pounds) (JUN)

12.4B

8:30

GBP

Public Sector Net Borrowing (Pounds) (JUN)

11.5B

8:30

GBP

Public Sector Net Borrowing ex Interventions (JUN)

10.3B

13.3B

8:30

GBP

Public Sector Net Borrowing ex Royal Mail, APF (JUN)

11.0B

13.3B

10:00

GBP

CBI Trends Total Orders (JUL)

8

11

Data from UK’s private sector which provides a measure of UK’s macro-economic health

10:00

GBP

CBI Trends Selling Prices (JUL)

3

10:00

GBP

CBI Business Optimism (JUL)

33

12:30

USD

Consumer Price Index (MoM) (JUN)

0.3%

0.4%

Measures increase of prices of a basket of products; significantly influences monetary policy expectations as CPI is an important mandate of major central banks, including the US Fed

12:30

USD

Consumer Price Index (YoY) (JUN)

2.1%

2.1%

12:30

USD

Consumer Price Index ex Food & Energy (MoM) (JUN)

0.2%

0.3%

12:30

USD

Consumer Price Index ex Food & Energy (YoY) (JUN)

2.0%

2.0%

13:00

USD

House Price Index (MoM) (MAY)

0.3%

0.0%

Indicative of change in the US Housing market, an important indicator that plays a role in monetary policy expectations and guidance.

14:00

USD

Existing Home Sales (JUN)

4.97M

4.89M

14:00

USD

Existing Home Sales (MoM) (JUN)

1.6%

4.9%

GMT

Currency

Upcoming Events & Speeches

3:00

AUD

RBA Governor Glenn Stevens Speaks on Australian Economy

7:30

EUR

EU Foreign Ministers Meet on Russian-Ukraine

9:00

EUR

Euro-Zone Government Debt (1Q)

9:30

GBP

UK to Sell £3.25 Bln in 10-Year Bonds

20:01

USD

US Earnings - Microsoft

-:-

USD

US Earnings - Apple

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.9418

2.1289

10.6645

7.7501

1.2466

Spot

6.6888

5.4511

6.1665

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3750

1.7247

102.19

0.8930

1.0692

0.9524

0.8822

139.83

1345.75

Res 2

1.3732

1.7223

102.04

0.8917

1.0679

0.9508

0.8806

139.61

1340.98

Res 1

1.3714

1.7199

101.89

0.8904

1.0665

0.9492

0.8789

139.40

1336.21

Spot

1.3679

1.7152

101.59

0.8878

1.0639

0.9460

0.8756

138.97

1326.67

Supp 1

1.3644

1.7105

101.29

0.8852

1.0613

0.9428

0.8723

138.54

1317.13

Supp 2

1.3626

1.7081

101.14

0.8839

1.0599

0.9412

0.8706

138.33

1312.36

Supp 3

1.3608

1.7057

100.99

0.8826

1.0586

0.9396

0.8690

138.11

1307.59

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

Sign up for John’s email distribution list, here.

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