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14.08.202414:29 Forex Analysis & Reviews: U.S. Inflation Set to Weaken the Dollar Further

Yesterday's producer price data already hinted at how traders are likely to react to reports and what could happen to the dollar if today's monthly U.S. consumer price report shows another modest increase, similar to what was observed last month. This would certainly reinforce the broadly held expectations of a Federal Reserve interest rate cut this September.

Exchange Rates 14.08.2024 analysis

The data released today by the Bureau of Labor Statistics is expected to indicate that both the consumer price index (CPI) and the core CPI, which excludes food and energy, rose by 0.2% in July this year. Such a figure would mark the smallest three-month increase in core inflation since early 2021. Economists expect that the weakness in July's CPI will be driven by a long-anticipated slowdown in rent growth, a drop in used car prices, and discounts on services.

Rental costs are expected to return to pre-pandemic levels in the near future. Economists predict that the slower pace will continue in the coming months, helping to contain the overall rise in the consumer price index. Rental costs are the largest category in the index, so they have a significant impact on determining future trends.

Used cars in the index, given their weight, could also contribute to a decline in July, helping to extend the downturn for the broader basket of core goods. As industry experts note, auction prices for used cars have now fallen by 26% compared to the peak observed a year ago, while CPI-calculated used car prices have dropped by 18%. A slight decrease in prices for new cars is also expected.

If the positive downward trend continues, the U.S. bond market could see further gains, leading to a further decline in the U.S. dollar. As mentioned above, yesterday's report on producer price growth in July came in below expectations. This triggered a surge in volatility. Many traders are now anticipating a more dovish stance from the Federal Reserve and weaker inflation figures, which could allow the Fed to start cutting rates as early as September this year.

As for the current technical outlook for EUR/USD, buyers need to focus on reclaiming the 1.1010 level. Only then can they aim for a test of 1.1035. From there, it could climb to 1.1080, but achieving this without support from major players will be quite challenging. The ultimate target would be the high at 1.1110. In the event of a decline, I expect serious action from large buyers around the 1.0975 level. If there's no support there, it would be wise to wait for a retest of the 1.0940 low or consider opening long positions at 1.0910.

For GBP/USD, pound buyers need to reclaim the nearest resistance at 1.2850. Only this would allow them to target 1.2890, above which a breakout would be quite difficult. The ultimate target would be the 1.2910 area, after which we could see a more significant surge towards 1.2940. In the event of a decline, the bears will try to regain control of 1.2820. If they succeed, breaking this range would deal a serious blow to the bulls and push GBP/USD down to the 1.2780 low, with a prospect of falling to 1.2730.

*Analisis pasar yang diposting disini dimaksudkan untuk meningkatkan pengetahuan Anda namun tidak untuk memberi instruksi trading.

Jakub Novak,
Analytical expert of InstaSpot
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