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US Dollar May Rise Further as PPI Data Stokes Inflation Fears

US Dollar May Rise Further as PPI Data Stokes Inflation Fears

Ilya Spivak, Head Strategist, APAC

US DOLLAR, INFLATION, PPI, FED, YIELDS, AUD/USD – TALKING POINTS:

  • US Dollar might continue higher if PPI data stokes reflation worries
  • Commodity FX may suffer outsized losses, AUD/USD at key barrier
  • Nasdaq, Dow Jones futures open the door for a consolidative pause

Financial markets registered mixed performance in Asia-Pacific trade.

Regional stock exchanges picked up on the negative lead from Wall Street, shedding close to 2 percent. That was after higher-than-expected US CPI figures stoked worries about rapid reflation that might force the Fed to pull back monetary stimulus faster than anticipated (as expected).

Price action in the G10 FX space was decidedly more muted. While APAC bourses had room to catch up having been closed during the prior day’s fireworks, the “always-on” spot currency markets had already on-boarded the news and settled into consolidation mode.

Commodities offered a range of outcomes. Cyclically-sensitive crude oil and base metals such aluminum, copper and iron ore echoed the broader risk-off mood, tracking lower. Rates-driven precious metals echoed FX market dynamics, with gold and silver retracing a bit higher after yesterday’s steep losses.

Gold price, US Dollar in digestion mode while APAC stocks decline

Chart created with TradingView

Looking ahead, a nearly empty economic calendar in European trading hours is likely to put April’s US PPI report in the spotlight. The core wholesale inflation rate is expected to rise to 3.8 percent on-year. An upside surprise may add to fears of stickier price pressures than can be written off as post-Covid rebasing.

Indeed, yesterday’s CPI stock was hardly an isolated incident. Realized US inflation data outcomes have topped baseline forecasts by a widening margin recently. In fact, figures from Citigroup put the disparity at the highest in nearly 13 years.

More of the same may give Treasury bond yields another upward jolt, driving the US Dollar higher against its major counterparts. If yesterday’s price dynamics prove instructive (see chart below), commodity currencies like the Australian, Canadian and New Zealand Dollars may suffer outsized losses in this scenario.

US Dollar price vs commodity currencies, Euro, Yen and Swiss Franc

Chart created with TradingView

However, it may be that investors have already priced in an April price growth jump already, leaving the PPI report with less market-moving potential than its higher-profile CPI analog. This might leave a bit of room for risk-on retracement across markets.

Tellingly, futures tracking the Nasdaq 100 index – where a tilt toward tech makes for outsized sensitivity to higher borrowing costs – are pointing higher. Contracts on the cash-rich Dow Jones Industrial Average are down in the meanwhile.

This might mean that the “sooner Fed tightening” story has taken a bit of a consolidative pause. The Greenback is vulnerable in the near term if this proves to be the path of least resistance, at least until US retail sales and consumer confidence reports capture the spotlight Friday.

AUD/USD TECHNICAL ANALYSIS – HEAD & SHOULDERS TOP TAKING SHAPE?

The Australian Dollar is at a key inflection point against its US counterpart against this backdrop. Prices recoiled from resistance in the 0.7820-49 zone to land within a hair of familiar range support at 0.7677, a barrier reinforced by a rising trend line set from the April swing bottom.

A daily close below this barrier would set the stage for a challenge of 0.7564, the neckline of a would be Head and Shoulders topping pattern developing since the start of the year. Breaching this boundary and thereby completing the formation would imply a measured down move below the 0.72 figure to follow.

Alternatively, establishing a foothold above 0.7849 – again, on a daily closing basis – would probably neutralize near-term selling pressure and open the door for gains. The next key barrier thereafter is marked by the 2021 swing high sitting squarely at the 0.80 figure.

Australian Dollar vs US Dollar price chart - daily

Chart created with TradingView

FX TRADING RESOURCES

--- Written by Ilya Spivak, Head Strategist, APAC at DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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