Forex Markets Watch U.S. Inflation and Fed Outlook
The gains from yesterday are being maintained by the US dollar today.There doesn’t appear to be any way out of the crisis in the Middle East any time soon. The front-month contracts for WTI and Brent oil, which surged by over 9% yesterday, are up 3.6% to 4.6% today. Today, three US-related developments will be watched with great interest. There is a deadline for the June CPI. It appears to have levelled off somewhat, but a sticky core rate could increase the perceived likelihood of a raise later this month, especially in light of Governor Waller’s comment yesterday. Additionally, at 10:00 AM, Chair Warsh will be appearing before the House Financial Services Committee. Third, today marks the beginning of the US earnings season as a number of major banks release their results.
Despite a weak yen and ongoing gains in oil prices, Japanese government bonds have gained today. The Japanese minister of finance, Katayama, proposed last week that pension funds increase their local allocation. In her speech today, she pushed for expanding the tax-free investment vehicles to include government bonds. At present, the dollar remains above the 162.00 Japanese yen level. Finally, tensions between China and the US and Europe are likely to rise as a result of the country’s larger-than-expected $125.6 billion trade surplus in June. The dollar strengthened due to the escalation of hostilities in the Middle East, and the euro hit a new low (just below $1.1380) since the release of the dismal US jobs data on July 3. Options worth roughly 3 billion euros expire today, and the euro is still battling to re-establish a footing above $1.1400, where yesterday’s low was held. If the price of the euro breaks below $1.1360, it might indicate a retracement to its June 24 low of approximately $1.1325.
The rising US interest rates and the lack of official measures to encourage Japanese pension funds to increase their local allocation put pressure on the yen. During the North American afternoon, the dollar almost hit JPY162.50. The dollar has not fallen below JPY162 today, but it is holding. As of July 1, the 40-year high was close to JPY162.85, while last week’s high was close to JPY162.70.Sterling seems to have formed a bearish shooting star candlestick after reversing lower after reaching $1.3450 before the weekend. Yesterday, following through on sales, it hit a three-day low just around $1.3350. Today, it fell to over $1.3340 before receiving a bid. As the value of the pound falls closer to $1.34 and options worth about GBP400 mln are set to expire today, the intraday momentum indicators are showing signs of stretching. Following the rebound from approximately $1.3140 on June 24, a correction is imminent if prices fall below last week’s low just above $1.3320.
Although the risk-off and spike in US short-term rates kept the Canadian dollar contained to a small range yesterday, it remained robust. Additionally, the two-year yield in Canada increased, and the disparity shifted slightly in favour of Canada. The Canadian dollar strengthened rather than consolidating, but the five-day moving average did go below the 20-day for the first time since approximately the middle of May. Within a 25-tick range of CAD1.4150, the US dollar moved. The dollar fell below its 20-day moving average (~CAD1.4175 today) for the second day in a row. Today’s follow-through selling of the US dollar has neared support near CAD1.4080. Although the intraday momentum indicators are out of whack, the range of CAD1.3980-CAD1.4000 marks the location of the next significant chart area. Just before the weekend, the Australian dollar hit a two-and-a-half week high, but subsequent trading was dismal. Its North American sale hit a three-day low yesterday, just below $0.6915. The Australian dollar was able to regain the 20-day moving average (~$0.6940) and retrace to a level slightly higher than $0.6950 after this area held. As of today, options worth around $475 million (at $0.6960) are set to expire. If we can break through Monday’s high, which was near $0.6970, the technical tone will improve.
