The U.S. dollar is starting the session modestly lower overall, although the moves remain relatively contained. The dollar is lower versus the euro, with EURUSD pair up 0.1% (lower USD), and slightly lower against the British pound, with GBPUSD up 0.01%. Against the Japanese yen, the dollar is also lower, with USDJPY pair down about 0.08%.
In the Kickstart video, I take a technical look at EURUSD, USDJPY and GBPUSD, focusing on the three things every trader needs to know before putting on a trade: the bias, the risk and the targets. Where do the buyers have control? Where do the sellers have control? What levels would shift that bias, and where are the targets if momentum starts to build?
In the U.S. debt market, Treasury yields are lower across the curve and supportive of the greenbacks decline but ahead of today’s data:
- 2-year: 4.180%, -1.9 bps
- 5-year: 4.353%, -2.2 bps
- 10-year: 4.674%, -1.8 bps
- 30-year: 5.239%, -0.8 bp
The curve remains upward sloping from the 2-year through the 30-year, while today’s decline in yields is somewhat larger at the front and middle of the curve.
U.S. stock futures are also pointing to a modestly higher opening:
- Dow: +141 points
- S&P 500: +6.25 points
- Nasdaq 100: +2.9 points
The economic calendar will be a major focus at 8:30 AM ET, led by July PPI and weekly jobless claims. Headline PPI is expected to rise 0.2% month over month, following a 0.3% decline previously, while the year-over-year rate is expected to ease to 4.9% from 5.5%. Core PPI is expected at +0.3% month over month, compared with +0.2% previously. Initial jobless claims are expected at 202K versus 199K last week.
Remember yesterday, U.S. CPI came in largely in line with expectations, with headline CPI rising 0.1% month over month and 3.4% year over year, while core CPI increased 0.2% on the month and 2.5% from a year ago. Shelter accounted for roughly two-thirds of the monthly increase, helping ease some concerns about broader inflation pressures.
That puts added importance on today’s PPI report. The combination of the CPI and PPI data will give economists most of the pieces they need to construct estimates for the forthcoming PCE inflation report, the Fed’s preferred inflation measure. Following yesterday’s CPI release, early estimates for monthly core PCE were running in a fairly wide range of roughly +0.16% to +0.23%. Today’s PPI details—particularly the components that feed directly into PCE—should help narrow that range and give markets a clearer picture of the underlying inflation trend ahead of the next Fed decision. The current expectations from the market is a 40% chance for a tightening in September. That is down from 62% a week or so ago (before the US jobs data).
Overnight in Europe, expectations for another ECB tightening are building. A Reuters poll shows 83% of economists expect the ECB to raise its deposit rate by 25 basis points to 2.50% in September, with most expecting rates to remain there through year-end.
Other overnight data also included updates from the UK, New Zealand and Japan. The UK economy expanded 0.4% in Q2, matching expectations but slowing from 0.6% in Q1. Growth was led by a 0.5% increase in services, while construction rose 0.3% and production was flat. GDP was 1.2% higher from a year ago, with the report unlikely to materially alter the Bank of England outlook.
In New Zealand, the RBNZ’s inflation expectations survey showed a notable cooling in price expectations. One-year inflation expectations fell to 2.6% from 3.4%, while the two-year measure eased to 2.3% from 2.5%. The softer readings have trimmed expectations at the margin for an RBNZ rate hike in September and helped keep pressure on the New Zealand dollar.
Meanwhile, Japan’s producer inflation remains elevated despite coming in below expectations. July PPI rose 7.2% year over year versus 7.4% expected, while prices increased just 0.1% on the month versus 0.6% expected. The bigger concern for the BOJ remains imported inflation, with yen-based import prices up 29.1% from a year ago. With the yen remaining weak and import costs elevated, the report does little to eliminate the possibility of a BOJ rate hike in September.
With inflation data and yields still driving expectations for central banks, today’s PPI and claims data have the potential to shake up the early market picture. For traders, however, the roadmap remains the same: know the bias, define the risk and identify the targets.
This article was written by Greg Michalowski at investinglive.com.