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13.08.201914:58 Forex Analysis & Reviews: Dollar unable to keep its gains on firm US CPI data

Long-term review

The US consumer prices (CPI) increased by 0.3% in July, in line with consensus forecasts, and the year-on-year reading was slightly higher than expected at 1.8% from the previous level of 1.6%.

Core inflation was stronger than expected and rose by 0.3%, while the year-on-year index strengthened to 2.2% from 2.1%. The Fed targets 2.0%.

Treasuries dipped lower following the rise of the 10-year yield to 1.65% from lows below 1.63% in early European trading. There was, however, a flattening of the yield curve which undermined sentiment, and treasuries quickly rallied.

The data should slightly dampen expectations that the Federal Reserve will cut interest rates aggressively on the grounds of low inflation.

In an immediate response, EUR/USD edged lower to 1.1210 from 1.1220, while USD/JPY inched up to 105.35 from 105.20, although dollar gains faded quickly.

Ahead of the CPI release, futures markets were pricing in a 79% chance of a further 0.25% rate cut at the September FOMC meeting with a 21% chance of a 0.50% rate cut.

The expectations of a September rate cut are still strong, but the likelihood of a 0.50% cut has diminished after the CPI data with futures. Now there is only a 7% chance of a 0.50% rate cut. This shift will provide support to the greenback.

Nevertheless, trade and growth fears are likely to dominate in the short term, and confidence will be extremely fragile. Political fears surrounding Hong Kong will also be a significant factor boosting risks and leading to further demand for the yen. The short positions on the euro might start getting closed given the growing risk of a breakout from a very narrow range.

Exchange Rates 13.08.2019 analysis

*这里的市场分析是为了增加您对市场的了解,而不是给出交易的指示。

Tim Clayton,
Analytical expert of InstaSpot
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