CPI Miss Calls Fed Credibility Into Question, Dollar At 10-Month Low

CPI Miss Calls Fed Credibility Into Question, Dollar At 10-Month Low

Highlights:

  • Weaker than expected inflation data alongside Retail Sales pushes USD to 10-month lows
  • CAD, GBP & AUD rise to close out the week stronger, ECB & BoJ on tap for next week
  • Crude Oil ends week 5% higher, but resistance remains.
  • Sentiment Highlight: Bullish GBP/JPY the FX play per IGCS

There are nearly too many developments to list as the week comes to a close and the Fed faces an embarrassing inflation print. First and foremost, US CPI and retail sales fell dragging down the Fed’s credibility who has called the low-flation phenomena transitory though this is the fourth straight monthly decline. The US CPI from the Bureau of Labor Statistics peaked in February at 2.7%, when Fed credibility and the need to tighten were riding high, but has since fallen to 1.6% or ~40%. This strong inflation drop also dropped the USD to 10-month lows (see chart below) with the probability of another rate hike in 2017 at coin-flip (50%) odds.

As the USD fell, other currencies against the dollar rightfully took off. The biggest show-steeler was the Canadian Dollar, which traded at 14-month lows after Friday’s US CPI figure and was catapulted by the BoC’s hawkish hike on Wednesday. The EUR is trading firmly ahead of the ECB next week and is set to close at the highest level since the opening weeks of 2015. Also, Cable is back above 1.3000 in hopes of future BoE tightening, and the Australian Dollar boosted by an impressive run in base metals thanks to Chinese policy reports is trading nearly 3% higher on the week. Also for good measure, the Dow & SPX500 closed the week at record highs. All that goes to show the benefit of a dovish Janet Yellen, a weak inflation print, and retail sales that the market is likely expecting the Fed to pullback, which will weaken the dollar and make risk-assets and non-USD FX great again.

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Lastly, Crude Oil finished the week as investors hope that demand will rise aligning with base metal demand from China that can help re-balance the oversupplied market. However, reports this week show reason to remain concerned. A report released Tuesday by the EIA showed U.S. crude production rose by 59,000 barrels to 9.397 million barrels a day in the week ended July 7, which was the highest level in almost two years. For traders looking at the chart, the level to focus on next week for a weekly close would be $48/bbl. A break above there, and we could be seeing the positive effects of an increasingly weak USD, which shows little signs of slowing down.

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CPI Miss Calls Fed Credibility Into Question, Dollar at 10-Month Low

Chart Created by Tyler Yell, CMT

Next Week's Main Events:JPY BOJ Monetary Policy Statement(JUL 20) + EUR European Central Bank Rate Decision (JUL 20)

IG Client Sentiment Highlight:Bullish GBP/JPY the FX play per IGCS

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

CPI Miss Calls Fed Credibility Into Question, Dollar at 10-Month Low

GBPJPY: Retail trader data shows 26.8% of traders are net-long with the ratio of traders short to long at 2.73 to 1. In fact, traders have remained net-short since Jun 30 when GBPJPY traded near 145.647; the price has moved 1.0% higher since then. The number of traders net-long is 17.8% lower than yesterday and 19.2% lower from last week, while the number of traders net-short is 8.0% lower than yesterday and 33.4% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPJPY prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPJPY-bullish contrarian trading bias. (Emphasis mine)

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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