Alert, dollar dealers!
We have a fresh batch of US CPI readings coming, so this could be your chance to catch big moves from the USD pairs.
Focus on the event:
Headline and core readings of the US CPI for June 2023
When will it be released:
July 12, 2023 (Wednesday), 12:30 PM GMT
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- US headline consumer price index m/m: expect 0.3% vs. 0.1% previously
- The main consumer price index in the United States on an annual basisExpectation: 3.1% vs. 4.0% previously
- US Core Consumer Price Index m/m: expect 0.3% vs. 0.4% previously
Related data since the last data event/release:
Arguments for a Weak/Bearish CPI Update for the US Dollar
- The price component of the ISM Manufacturing PMI for June It fell from 44.2 to 41.8 to reverse the pace of sharper declines
- PMI price component of ISM services for the month of June It fell by 2.1 points, to 51.4, indicating a slowing pace of gains
- June S&P Global Manufacturing PMI Reflecting “a faster fall in input costs with little change in selling prices”
- Jun. S&P Global Services PMI It showed “the steepest input cost inflation since January” but “output duties rose at the slowest rate in four months.”
- Producer price index for the month of May It fell at a sharper pace of 0.3% m/m versus an expected decline of 0.1%, and the core PPI showed a gain of 0.2% as expected.
- Import prices may It decreased by 0.6% on a monthly basis, compared to an estimated decrease of 0.5%.
Previous issues and the impact of the risk environment on the US dollar
June 13, 2023
Event Results/Price Action:
The headline CPI for May missed target, coming in at 4.0% yoy against estimates of a decline of 4.9% to 4.3%. The core version of the report also fell from 5.5% y/y in April to 5.3% in May.
As a result, the dollar gave up most of its gains earlier in the week, as traders adjusted their bets on a possible Fed stall.
The Federal Open Market Committee kept interest rates unchanged as expected, but noted that two more hikes are on the horizon, allowing the dollar to rebound from its subsequent decline. However, another batch of mostly downbeat data forced the greenback to resume its slide on Friday.
Risk Environment and Internal Market Behaviors:
Traders appeared to be on edge early in the week, as the calendar was packed with high-profile releases and central bank decisions.
Risk flows surged when the People’s Bank of China (PBOC) surprised the markets with their decision to cut the 7-day reverse repo rate from 2.0% to 1.9% and lower the internal reference rate by 200 basis points.
Safe havens gave up more ground as market players caught wind of downbeat data from China, boosting hopes for more stimulus.
May 10, 2023
Event Results/Price Action:
The April CPI report came in mixed, with the consensus reading coming in at a 0.4% MoM gain and the core reading beating expectations. However, the annual reading eased slightly, dropping from 5.0% to 4.9% to mark the smallest 12-month increase since April 2021.
The US dollar was already in full swing at the start of the trading week, as market watchers were preparing for this very report. The sell-off accelerated when the actual numbers were released as weak price pressures reinforced expectations of a Fed pause in June.
Risk Environment and Internal Market Behaviors:
Debt ceiling problems were also part of the dollar’s laundry list, as negotiations had been delayed over the previous week. Troubles in the banking sector also remained in the background when another regional bank announced a sharp drop in deposits.
Fortunately for the dollar, it was able to build on its safe-haven appeal later on, as the spotlight shifted to fears of a global recession thanks to “bullish bullish” announcements and a slew of weak Chinese data.
Price action odds:
Possibilities of feeling risky:
Still the game of “Do they or don’t they?” dollar traders when it comes to betting on a rate hike in July, as economic data is giving mixed signals.
While the June decision indicated scope for further tightening should the data call for it, suspicions that price pressures could remain high could be enough to tip the scales in favor of another pause this month.
US dollar scenarios:
Possible base scenario:
Leading indicators mostly point to weak inflation, so the pessimistic data may be enough to put the nail in the coffin when it comes to another month of keeping Fed rates unchanged.
If so, we could see a similar dollar reaction to the May CPI release, resulting in a sharp faltering across the board when the actual numbers are printed.
In this scenario, look for potential short selling of the US dollar against higher-yielding currencies, especially the Australian and Canadian dollars, as central banks have recently resumed raising interest rates. Comdoll gains may be extended for the rest of the week if risk appetite persists.
The dollar’s short-term bearish positions may also work against the euro and the pound, as the European Central Bank and Bank of England appear to be sticking to their bullish bias.
Possible alternative scenario:
A surprise bullish CPI could fuel expectations of a Fed rate hike later this month, which could allow the dollar to rally against its peers.
Risk aversion flows could favor the safe-haven dollar as the prospect of rising global borrowing costs tends to keep market participants wary of a potential recession.
In this scenario, keep an eye out for USDNZD buying opportunities, especially since it is widely expected that the Reserve Bank of New Zealand (RBNZ) will announce its first tightening halt.
