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Talking Points:

- The US Dollar is driving back down to support after a disappointing batch of U.S. data this morning, with both Advance Retail Sales and Producer Prices coming-in below expectations.

- Next week sees data releases pick-up, and of considerable interest is Japanese GDP on Sunday night and U.S and U.K. CPI numbers to be released on Tuesday.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

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This week presented very little data with Friday morning being the notable exception. On Friday morning, we got a batch of European GDP numbers ahead of the release of US Retail Sales data and Producer Price Index Numbers. US Advance Retail Sales is an important print because, similar to Non-Farm Payrolls it’s a very early look at the most recent completed month of economic activity. Because of this early release, the data will have a tendency to be a bit messy with revisions in the months following, but this will usually be one of the first chances that markets will get to evaluate the most recently completed month worth of consumer activity.

But it was another data point that usually carries a bit less importance that may be providing more of a near-term driver to the US Dollar, and that was the release of this morning’s Producer Price Index. PPI is thought to be a pre-cursor to inflation because if producer’s prices are increasing, that will usually be passed on to the consumer and, eventually bring on consumer-level inflation. Given the Fed’s recent stance with rate-hike policy, any clues or hints of inflationary pressure (or lack thereof) could be telling for market expectations of potential tweaks to Fed policy. Headline PPI contracted by -.2% year-over-year versus an expectation for a .2% gain; and Core PPI (excluding food and energy) came-in at .7% versus an expectation of 1.2%.

And for a US Dollar that’s been rather chaotic of recent, that additional information could be helpful for the development of near-term trends. Two weeks ago the US Dollar dropped dramatically on the abysmal U.S. GDP print from the 2nd quarter of this year, only to re-strengthen a week later as Non-Farm Payrolls came-in far above expectations. But with this morning’s disappointing, the US Dollar is driving back towards prior support levels.

USD/JPY Sinks to Support as PPI Contracts

Created with Marketscope/Trading Station II; prepared by James Stanley

Next week will see activity pick up a bit, but more likely, it’s the Jackson Hole Summit at the end of the month (August 25-27) that traders will be looking to for that next onslaught of major volatility in USD. The next couple of weeks could present more see-saw like price action across major markets unless a global risk factor begins to flare-up; and this is certainly possible, so traders would likely want to remain cautious in this summer-trading environment. With a Chinese economy that’s continuing to exhibit signs of slowdown, risk aversion could always be around-the-corner, so vigilance is a near-necessity in low-volatility environments, as that ‘low-vol’ may not stick around for too long.

Tuesday should be of particular importance, as CPI numbers will be reported for both the U.K. and the U.S., but before we get to that, Japanese GDP should garner considerable focus given recent expectations around the Bank of Japan. Last month, expectations were ramped up for an increase of stimulus and the Bank of Japan largely underwhelmed. But as we said ahead of that meeting, even if ‘helicopter money’ wasn’t triggered in July, this likely wouldn’t preclude increases in stimulus at future meetings, with September being a more likely period to get such an announcement from the BoJ, if it is to come at all.

Ahead of next week’s Japanese GDP print, USD/JPY finds itself sitting just above a fairly strong zone of support in the ¥100-range. Given the scope of policy divergence, with the BoJ likely to embark on more stimulus at some point in the future while the Fed evaluates data ahead of hopes to hike rates, this could be an attractive top-side setup should signs of economic malaise continue to show in Japan. Should weakness continue to show in Japanese data, we’ll likely see traders factoring-in higher probabilities of an actual move from the Bank of Japan, and this could lead to Yen weakness as anticipation for even more stimulus for Japan runs higher.

USD/JPY Sinks to Support as PPI Contracts

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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Contact and follow James on Twitter: @JStanleyFX