Dollar’s momentum fades slightly, attention turns to US inflation data

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A relatively quiet week is expected in terms of economic events, with no central bank meetings scheduled. However, a critical economic report to watch out for is the US Consumer Price Index (CPI) on Thursday.

Here is what you need to know for next week: 

The US Dollar pulled back on Friday, following the Nonfarm Payrolls report that showed the economy added 187,000 jobs in July and June figures were revised lower to 185,000, the lowest reading since December 2020. The numbers offer more evidence of a softening in the labor market. 

Friday’s decline in the US Dollar does not appear to be solely driven by the data itself. It seems more like profit-taking and a shift in risk appetite. While US jobs data may have been below expectations, with the Unemployment Rate dropping and Average Hourly Earnings rising above expectations, these factors alone do not fully explain the decline in the US Dollar.

Next week in the US, the key report will be the July Consumer Price Index (CPI) scheduled for release on Thursday. Market expectations anticipate a 0.2% monthly increase. Additionally, on Friday, the Produce Price Index (PPI) will be released. Inflation figures will be crucial for the US Dollar and for shaping monetary policy expectations. However, there is still a significant amount of time before the next FOMC meeting, which is scheduled for September 19-20. In the interim, there will be more data to assess, including August inflation and Nonfarm Payrolls. Other key reports for next week are Chinese trade data and inflation, and UK growth. 

Analysts at RBC Capital Markets on US CPI: 

Year-over-year growth in U.S. consumer prices likely ticked slightly higher for the first time in a year in July – gasoline prices didn’t move much this July but a larger 8% drop in July a year ago will fall out of the 12-month growth rate. Year-over-year growth in core (ex-food & energy) prices will still be high (we expect +4.7%) in July, but we expect a moderate 0.2% month-over-month increase to match the June gain. Slower growth in core CPI has come alongside a pullback in home rent inflation as earlier slowing in market asking rent growth feed through to lower rent CPI with a lag as contracts get renewed.

The US Dollar performed well during the week and finished modestly higher against most of its rivals. However, it ended the week on a weaker note, far from its peak and under some pressure. This came after a five-day rally leading up to Thursday. The question now is whether this recent move represents a correction from the rally that started in mid-July or if it marks the beginning of a resumption of the downtrend.

EUR/USD finished the week unchanged, trading above 1.1000, well above its weekly low of 1.0912, and also above the 20-week Simple Moving Average (SMA).

Following the Bank of England rate hike, GBP/USD hit a monthly low at 1.2618 but managed to trim its weekly losses and climbed towards 1.2800. EUR/GBP experienced an increase during the week, closing above 0.8600, staying sideways below the 20-week SMA.

Despite the surprise bond buying by the Bank of Japan, USD/JPY ended the week lower and far from the 144.00 area. The Japanese Yen displayed mixed results across the board as the BoJ’s monetary policy stance was partially offset by risk aversion.

AUD/USD declined for the third consecutive week, breaking below 0.6600, although the pair managed to remain above 0.6500. Similarly, NZD/USD fell for the third week in a row, concluding the week around 0.6100. Antipodean currencies were the worst performers among the G10 currencies due to concerns about the economic outlook and lower commodity prices.

USD/CAD broke through a range and the key resistance at 1.3250, surging towards 1.3400 and testing the 20-week SMA. Canadian employment data did not support the Loonie, which failed to benefit from the rally in crude oil prices.