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US Dollar May Rise as Inflation Fears, Fed Outlook Hoard the Spotlight

US Dollar May Rise as Inflation Fears, Fed Outlook Hoard the Spotlight

Ilya Spivak, Head Strategist, APAC

US-CHINA TRADE TALKS, VICTORIA LOCKDOWN, PCE, INFLATION, USD/JPY – TALKING POINTS:

  • Markets muted despite US-China trade talks, new lockdown in Victoria
  • Inflation pickup and its impact on Fed policy in focus as PCE data nears
  • USD/JPY resistance break puts one-month range top in the crosshairs

Financial markets put in an uninspiring performance in Asia-Pacific trade. The G10 FX currencies idled, as did gold and crude oil prices. Regional stock exchanges edged slightly lower on average, shifting down alongside bellwether S&P 500 futures.

The soggy backdrop is curious considering an assortment of noteworthy headlines that might have been expected to inspire volatility. Australia’s state of Victoria reintroduced Covid lockdown measures after an outbreak in Melbourne while the US and China held the first Biden-era round of trade talks.

Shares in China rose, seemingly after Beijing said that a chat between US Trade Representative Katherine Tai and Chinese Vice Premier Liu He “conducted candid, pragmatic and constructive exchanges [based on] mutual respect. The CSI 300 stock index popped quickly higher but swiftly retraced most of the move.

MARKETS SHRUG OFF US-CHINA TRADE TALKS, VICTORIA LOCKDOWN

The cautious mood probably reflects a sense of anxiety ahead of Friday’s release of April’s US PCE data, the Fed’s favored inflation gauge. It is expected to show that the core growth rate jumped to 2.9 percent on-year, the highest in nearly three decades.

US price growth readings have increasingly outperformed relative to baseline forecasts in recent months, suggesting that analysts are underestimating the degree of reflation underway. If PCE readings overshoot accordingly, speculation about a sooner-than-expected tapering of Fed stimulus may heat up anew.

US inflation data increasingly surprises higher as price growth expectations build

In this scenario, the US Dollar is likely to march broadly higher alongside Treasury bond yields. Meanwhile, a round of selling is likely to across sentiment-sensitive assets including stocks, growth-geared commodities like crude oil, and cyclical currencies like the Australian Dollar. Anti-fiat gold looks vulnerable too.

USD/JPY TECHNICAL ANALYSIS – DOLLAR LOOKS POISED FOR ANOTHER UPSWING

Near-term positioning shows USD/JPY has broken above trend line resistance guiding the downswing over the past two weeks. The breach seemingly opens the door for a move higher to test range resistance in the 109.62-79 zone once again. Clearing that may open the way above the 110.00 figure.

Immediate support continues to sit in the 108.30-55 region, an inflection zone that has acted as both relevant support and resistance since early March. A move back below the outer layer of this threshold may set the stage for another challenge of the swing bottom at 107.45.

USD/JPY price chart - 8 hour

Chart created withTradingView

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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