The US CPI report for July yesterday fell within expectations and that is perhaps the last thing traders were hoping for this week. While it set the tone that inflation isn’t exactly running hot, it is not enough to discount the possibility of the Fed still needing to raise interest rates in September.
The dollar came under some pressure as traders pared back some bets on a Fed move next month. But as the dust settles, things are looking more muted today with dollar pairs returning to tight ranges once again.
[EUR/USD daily chart]
EUR/USD is settling back into a 20-pips range so far today, following another brush up against the 100-day moving average (red line) overnight. The key resistance level has been holding the upside momentum so far this month with even a softer non-farm payrolls print and more benign set of inflation numbers not being enough for buyers to capitalise on.
And that especially after the dollar has been weakened by the joint intervention play by the US and Japan in defending the yen, even through EUR/JPY buying as well.
[USD/JPY daily chart]
Much like the previous intervention effort in late April and early May, there is a lack of follow through in terms of price action once again this time around.
Traders are still convinced that the path of least resistance is still for a weaker yen. And so far, they are being vindicated by a return of heated tensions between the US and Iran alongside the continued closure of the Strait of Hormuz and further disruption to the Red Sea crossing.
USD/JPY has now made its way back above the 159.00 level and has roughly halved the intervention drop from the end of July. That being said, it will be a big test of buying appetite to try and push towards the 160.00 mark – alongside the 100-day moving average (red line) nearby.
That is still seen as the key psychological level in which we are likely to see Tokyo and perhaps Washington decide to intervene again, if need be.
As such, dollar traders are very much caught in a bind right now. They can’t move things too far without potential to incur the wrath of another intervention knockdown. However, there’s also no real spark to add to dollar shorts so long as higher bond yields stay in play with the US-Iran conflict continuing as it is. The latter in particular feeds into the former and will keep hopes of a Fed rate hike for September alive.
So, that is very much helping to put a floor on dollar losses as well – alongside some help from the technical positioning above.
Traders will be hoping for more of a spark to come in the week(s) ahead. But all else being equal, we might have to wait until Jackson Hole at the end of the month before finding any real conviction and clarity for the dollar. That unless we get some fresh developments from the US-Iran conflict to shake up the inflation, and in turn the Fed, outlook.
This article was written by Justin Low at investinglive.com.