US Dollar Edges Down Ahead of Key Inflation Read

10 August 2022, 02:10

Market Focus

Stocks retreated on Tuesday as a downbeat outlook from chipmaker Micron added to recession fears. Investors were unwilling to make any risky moves before Wednesday’s pivotal inflation reading, which is forecast to withdraw a bit while still remaining at high levels. The report will come on the heels of recent jobs figures underscoring sliding wage growth and US productivity data highlighting another surge in labor costs that could further complicate the Federal Reserve’s decision to tame inflation. Timing the peak of inflation is difficult, especially after June’s CPI print turned out to be hotter than expected. It’s also worth noting that Bitcoin resumed its slump, ending a four-day winning streak as volatility continues to whipsaw the crypto world.

The benchmarks, S&P500 and Dow Jones Industrial Average both slid on Tuesday amid risk-off sentiment ahead of a release of a key consumer index. Seven out of eleven sectors stayed in negative territory, with Consumer Discretionary and Information Technology performing the worst among all groups, with 1.54% and 1.00%  losses respectively on Tuesday. However, the Energy and Utilities sectors outperformed all the other groups, rising 1.77% and 1.06% respectively for the day. The Dow Jones Industrial Average declined 0.2%, Nasdaq 100 dropped 1.1%, and MSCI world index fell 0.5%.

Main Pairs Movement

The US dollar changed little bit down on Tuesday, as thin summer trading and risk appetite dwindled ahead of critical inflation figures that could offer clues on how hawkish the Federal Reserve will be in its interest rate hike in September. The DXY index had drifted lower from the start of trading session, but then rebounded to oscillate in a range of 106.1 to 106.4 level as stock markets slid on profit warnings, inflation concern and data showed U.S. worker productivity fell sharply in the second quarter.

GBPUSD remained almost unchanged for the day. Cable edged higher amid some greenback selling at the first half of Tuesday, then faced selling pressure and lost all the gains earlier as pessimism in UK economic data and hawkish stance of Fed. Meanwhile,  EURUSD attracted fresh transactions and touched a daily high level of nearly 1.025 as the US dollar weakened across the board during the Asia trading session, then pulled back to 1.021 ahead of CPI index. The pair advanced 0.16% on Tuesday.

Gold surged, as global recession concerns weighed on investors’ sentiment and benefited the safe-haven metal. XAU/USD touched a one-month high of $1800 during the US trading session amid bad news from the US stock markets and investor caution ahead of the CPI report.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair advanced on Tuesday, preserving its bullish strength and extending the previous rebound toward the 1.022 area as investors await the key US CPI data. The pair is now trading at 1.02214, posting a 0.29% gain on a daily basis. EUR/USD stayed in the positive territory amid a weaker US dollar across the board. Investors remain cautious ahead of the release of the US Consumer Price Index on Wednesday, which would set the tone of the Federal Reserve’s September meeting. For the Euro, the latest news showed that Russia has suspended oil flows via the southern leg of the Druzhba pipeline, which acted as a headwind for the shared currency and limited the upside for EUR/USD.

On the technical side, the RSI is at 55, suggesting that upside is losing strength as the RSI continues moving toward the midline. As for the Bollinger Bands, the price failed to touch the upper band and witnessed some selling, therefore the bearish momentum should persist. In conclusion, we think the market will be bearish as long as the 1.0246 resistance line holds. Technical readings in the chart skew the risk to the upside, as the technical indicators retreated toward their midlines.

Resistance:  1.0246, 1.0287, 1.0438

Support: 1.0150, 1.0111, 0.9991

GBPUSD (4-Hour Chart)

The GBP/USD pair edged higher on Tuesday, failing to extend its upside movements and dropped toward the 1.208 mark to erase most of its daily gains in the US session amid the rebound witnessed in the US dollar. At the time of writing, the cable stays in positive territory with a 0.09% gain for the day. The negative shift witnessed in risk sentiment is helping the greenback to find demand and exerted bearish pressure on the GBP/USD pair. For the British pound, the Bank of England Deputy Governor Dave Ramsden’s hawkish comments on Tuesday have underpinned the cable, as he said that it’s more likely than not that BoE will have to raise bank rate further even if a recession forces it to start lowering the policy rate.

The RSI is at 46, suggesting that the downside is more favored as the RSI stays below the midline. For the Bollinger Bands, the price lost its upside traction and dropped below the moving average, therefore a continuation of the downside trend can be expected. In conclusion, we think the market will be bearish as long as the pair fails to break above the 1.2121 resistance line. On the downside, sellers could show interest if the pair falls back below 1.2027 support and additional losses could be expected.

Resistance: 1.2121, 1.2188, 1.2277

Support: 1.2027, 1.1940, 1.1897

XAUUSD (4-Hour Chart)

As the US dollar remained on the back foot throughout the day despite the cautious market mood on Tuesday, the pair XAU/USD preserved its upside strength and extended the rebound toward the $1,800 area during the US trading session. XAU/USD is trading at 1797.05 at the time of writing, rising 0.44% on a daily basis. The modest US dollar weakness and sour market sentiment both provided support to the dollar-denominated gold, as the growing fears about a global economic downturn continued to weigh on investors’ mood recently. However, the Fed rate hike expectations might limit the upside for the precious metal as markets are now pricing in a 70% chance for a 75 bps Fed rate hike move at the September meeting following the upbeat US job data last Friday.

Meanwhile the RSI reads 64, suggesting the pair’s bullish outlook in the near term as the RSI indicator remains above the midline. For the Bollinger Bands, the price continues to rise toward the upper band, therefore a continuation of the upside trend could be expected. In conclusion, we think the market will be bullish as the pair is testing the 1794 resistance line. It’s likely that the pair could break above that level and extend its upside movements toward the $1,811 mark.

Resistance: 1794, 1811, 1831

Support: 1769, 1756, 1735