Dollar Slips But Yet to Break Ahead of Key Inflation Data, Next Week?s NFPs

Talking Points:

• Dollar Slips But Yet to Break Ahead of Key Inflation Data, Next Week’s NFPs
• Euro: Speculation for ECB Stimulus Faces Definitive Data
• British Pound Unable to Leverage Recovery on Mixed Economic Update

Dollar Slips But Yet to Break Ahead of Key Inflation Data, Next Week’s NFPs

The Dow Jones FXCM Dollar (ticker = USDollar) slipped a second day Thursday, but bears struggled to mount a meaningful offensive. Where it is difficult to pursue a trend when market participation is draining, it is significantly harder to source momentum for a major reversal. Both greenback and equities are left exposed as the tide of liquidity recedes after their fundamentally-light rallies. However, that same nuance on participation can also paradoxically help to stabilize. In the final trading session of the week, the focus will turn back onto Fed rate expectations. Where the dollar seems to be riding a wave of hawkish sentiment, yields and rates have trailed the swell in conviction. The PCE (personal consumption expenditure) inflation reading for July is due at 12:30 GMT. The Fed’s favored inflation reading, this series’ shortfall of the same 2.0 percent figure the CPI has seen recently is key reason the Chairwoman Yellen and crew have not raised their threat assessments. If this shifts against a consensus of no change, we may have something to work with. Otherwise, the onus for volatility will either rest with a major risk-based shift into the end of the week (highly unlikely) or the pickup in data next week (including NFPs) alongside a return in liquidity.

Euro: Speculation for ECB Stimulus Faces Definitive Data

The Euro’s docket was active this past session, but the data’s influence rises materially in the final trading day of the week. The currency slipped against most counterparts Thursday between the retreat in Euro-area sentiment surveys and the fading Germany figures. Labor data (an increase in the unemployment rate) and inflation statistics (a hold of an anemic 0.8 percent CPI) set the stage for similar region-wide figures ahead. The Eurozone jobless rate and August CPI readings are due at 9:00 GMT, and neither is expected to change from their already-troubled levels. Whether ‘in-line’ or a change from consensus, this data is important as it will help shape speculation over whether the ECB will consider an asset purchase program next week or at all.

British Pound Unable to Leverage Recovery on Mixed Economic Update

While the data out of the UK was notably mixed this past session, perhaps the currency is also seeing its sensitivity to economic data (as a guidance for altering BoE rate expectations) diminish after the Cable’s near-700 pip reversal from July highs. Among the readings, the GfK’s consumer sentiment report for August was the bull’s life preserver with an unexpected positive reading that pushed it back towards decade highs. Meanwhile, the Hometrack’s housing sector data, CBI retail activity and Lloyd’s Business sentiment measures all eased. We have another housing price report ahead, but next week’s data will likely carry more weight – particularly the BoE’s 12-month inflation forecast survey.

Yen Crosses Slide, But Not on Data

There was a near uniform slide for the Yen crosses this past session, but it wasn’t really a move founded on the data read this morning. The figures were unflattering between an uptick in the jobless rate, a sharper drop in household spending, a drop in retail sales and weaker industrial production figure. The CPI figures are not so easily judged as they are above the BoJ’s target, but wages are certainly not keeping pace with ‘costs’. Risk is still the primary motivator here. If traders don’t lead a big shift in speculative positioning to end the week, the Yen will hold.

Canadian Dollar and Australian Dollars Face Important Rate Speculation Ahead

In the final 24 hours of the trading week, the Canadian dollar will prove one of the most fundamentally burdened amongst the majors. The docket offers up GDP figures for June and the annualized reading for 2Q. Thesecan be market movers – particularly given the hefty upgrade expected in the latter report – but the real influence here is what this data could hold in store for next week. The BoC rate decision next week is generating more interest amongst the loonie traders who believe the central bank will have to drop its dovish tone (at least that is the justification often used for the currency’s recent gains). Another major that will be monitored closely for its backdrop monetary policy bearings in the week ahead if the Australian dollar. Wavering on its neutral standing, the RBA meets amid ahead of 2Q GDP figures.

Emerging Markets: 2Q GDP Figures on Tap, Ukraine Concerns Spread

After a consistent climb through the week, the Emerging Markets took a serious blow Thursday. Capping a three-day advance, the MSCI ETF suffered a 1.0 percent drop – the biggest in three weeks. This move had its roots in the moderation of the broader financial markets (taking cues from the developed world’s equity indexes), but it would also find particular motivation from one of its more geopolitically-taxed members. International debate over whether Russia has ‘invaded’ Ukraine or not has unsettled investors. From the Ruble, this concern was manifested in a 1.5 percent plunge versus the greenback – the biggest since July 17. Traders should keep a close eye on this region of the world, but the calendar will also offer scheduled disruptions in the form of Brazilian and Indian 2Q GDP figures at 12:00 GMT.

Gold Gains on Dollar’s Slip, Eurozone Stimulus Views Could Deliver Bigger Move

Gold’s record continues to improve. The metal advanced another 0.6 percent this past session for a third consecutive gain. And yet, it has done little to change conviction in its broader trend. Not only is the market slow in its recovery – repeatedly retracing morning gains with afternoon corrections – but participation figures continue to flounder. In the futures, aggregate open interest is dallying at multi-year lows. For ETF interest, total exposure to the commodity (55.52 million ounces) is just off its lowest level in five years. Bulls need hope, bears need motivation. The dollar’s recent slip has been enough to nudge gold higher, but there is little momentum behind this driver. Ahead, we will see if the US inflation data can change that. If the Euro-area data and US data offer a similar outcome (hawkish/dovish), it could leverage the metal impact.

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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