Heads up, dollar traders!
We’ve got a fresh batch of U.S. CPI readings comin’ right up, so this might be your chance to catch big moves off USD pairs.
Event in Focus:
U.S. headline and core CPI readings 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:
- U.S. headline consumer price index m/m: 0.3% forecast vs. 0.1% previous
- U.S. headline consumer price index y/y: 3.1% forecast vs. 4.0% previous
- U.S. core consumer price index m/m: 0.3% forecast vs. 0.4% previous
Relevant Data Since Last Event/Data Release:
🔴 Arguments for Weak CPI Update / Bearish USD
- June ISM manufacturing PMI prices component fell from 44.2 to 41.8 to reflect sharper pace of declines
- June ISM services PMI prices component dropped 2.1 points to 51.4, indicating a slower pace of gains
- June S&P Global manufacturing PMI reflected a “faster decrease in input costs with selling prices little-changed”
- June S&P Global services PMI showed “input cost inflation sharpest since January” but “output charges increased at slowest rate in four months”
- May producer price index fell at steeper 0.3% month-over-month pace vs. projected 0.1% dip, core PPI showed a 0.2% uptick as expected
- May import prices tumbled 0.6% month-over-month vs. estimated 0.5% decline
Previous Releases and Risk Environment Influence on the U.S. Dollar
June 13, 2023
Overlay of USD Pairs: 1-Hour Forex Chart by TV
Event results / Price Action:
Headline CPI for May missed the mark, coming in at 4.0% year-over-year versus estimates of a drop from 4.9% to 4.3%. The core version of the report also tumbled from 5.5% year-over-year in April to 5.3% in May.
As a result, the Greenback gave up most of its gains from earlier in the week, as traders adjusted bets for a likely Fed pause.The FOMC kept rates unchanged as expected but signaled that two more hikes could be on the horizon, allowing the dollar to pull up from its drop later on. However, another batch of mostly downbeat data forced the U.S. currency to resume the slide on Friday.
Risk environment and intermarket behaviors:
Traders seemed to be on edge early in the week, as the scheduled was filled with top-tier releases and central bank decisions.
Risk-on flows picked up when the PBOC surprised the markets with their decision to cut the 7-day reverse repo rate from 2.0% to 1.9% and lower the onshore reference rate by 200 points.
Safe-havens gave up more ground when market players got wind of downbeat data from China, as these boosted hopes for more stimulus.
May 10, 2023
Overlay of USD Pairs: 1-Hour Forex Chart by TV
Event results / Price Action:
The April CPI report came in mixed, with the headline reading hitting the consensus of a 0.4% monthly uptick and the core reading beating expectations. However, the annual reading fell slightly short, as it dipped from 5.0% to 4.9% to mark its smallest 12-month increase since April 2021.
The U.S. dollar was already on shaky footing at the start of the trading week, as market watchers were bracing for this particular report. The selloff accelerated when the actual figures were printed since subdued price pressures reinforced expectations for a Fed pause in June.
Risk environment and intermarket behaviors:
Debt ceiling troubles were also part of the dollar’s laundry list of concerns, as negotiations were postponed during the previous week. Banking sector troubles also stayed in the backdrop when another regional bank reported a sharp decline in deposits.
Fortunately for the dollar, it was able to bank on its safe-haven appeal later on, as the spotlight moved to fears of a global recession thanks “dovish hike” announcements and a slew of weak Chinese data.
Price action probabilities:
Risk sentiment probabilities:
It’s still a game of “Will they or won’t they?” for dollar traders when it comes to betting on a July rate hike, as economic data has been giving mixed signals.
While the June decision signaled scope for more tightening if data calls for it, doubts that price pressures could stay elevated might be enough to tip the scales in favor of another pause this month.
U.S. Dollar scenarios:
Potential Base Scenario:
Leading indicators are mostly pointing to subdued inflation, so downbeat data might be enough put the nail in the coffin when it comes to another month of keeping Fed interest rates unchanged.
If that’s the case, we might see a similar dollar reaction to the May CPI release, which spurred a sharp tumble across the board when the actual numbers were printed.In this scenario, look out for potential short USD plays against higher-yielding currencies, particularly AUD and CAD since their central banks have recently resumed hiking rates. Comdoll rallies might even be extended for the rest of the week if risk appetite remains in play.
Short-term bearish dollar positions against EUR and GBP might also work out, as the ECB and BOE seem committed to their hawkish biases.
Potential Alternative Scenario:
An upside CPI surprise could fuel expectations for a Fed rate hike later this month, which might allow the dollar to pull up against its counterparts.
Risk-off flows might also favor the safe-haven dollar since the prospect of higher global borrowing costs tend to keep market participants wary about a potential recession.
In this scenario, keep an eye out for opportunities to buy the dollar against the Kiwi, especially since the RBNZ is widely expected to announce its first tightening pause.