Forex Today: Dollar not shining despite US data and Fed's tone, attention turns to inflation

Attention will turn next week to US inflation numbers following the labor market data. Those numbers will be watched closely ahead of the July 25-26 FOMC meeting. China will also release inflation data. In the UK, employment data is due on Tuesday. Regarding recent central bank decisions, the Reserve Bank of New Zealand and the Bank of Canada will announce their decisions on Wednesday.

Here is what you need to know for next week: 

Data released on Friday shows Nonfarm Payrolls increased by 209,000 in June, coming in below expectations for the first time in 15 months. A positive surprise was expected again after the impressive ADP report released on Wednesday. Despite slowing down, the positive signs from the labor market led the market to expect that the Federal Reserve (Fed) will hike its interest rate by 25 basis points at the July meeting.

The key numbers due next week will be inflation figures from the US, which will impact Fed rate hike expectations. On Wednesday, the June Consumer Price Index (CPI) will be released, and on Thursday, the Producer Price Index (PPI). The CPI is expected to rise by 0.3% on a monthly basis, and the annual rate is expected to decline from 4.0% to 3.1%, while the Core CPI is seen falling from 5.3% to 5.0%.

The US Dollar Index dropped sharply on Friday after NFP and finished the week significantly lower, around 102.25, rejected from above 103.00. The Greenback failed to benefit from higher US yields. The 10-year yield broke above 4.00% for the first time since March, but this time it is holding above.

EUR/USD rebounded from the 20-week Simple Moving Average and finished the week higher, above 1.0950. Next week, the Euro needs to rise above 1.1000 to open the doors to more gains. The pair benefited from higher Eurozone (EZ) bond yields. No key reports are due from the EZ next week. The European Central Bank (ECB) will release the minutes of its latest meeting. A 25 bps rate hike in July is fully priced in.

GBP/USD posted the highest weekly close in more than a year above 1.2800, after rising sharply during Thursday and Friday. The pair is testing year-to-date highs around 1.2850. On Tuesday, the UK will report employment data, and GDP on Thursday.

After falling sharply on Friday, USD/JPY completed the worst week in months, retreating from near the potential intervention area at 145.00 to the 142.00 area. The Japanese yen was the top performer among the G10 space.

USD/CAD fell significantly on Friday after the Canadian jobs report showed the economy added 60,000 jobs. The number helped reaffirm expectations that the Bank of Canada will raise interest rates by 25 basis points at next week's meeting. The pair pulled back from month-to-date highs near 1.3400 toward 1.3250.

Analysts at TD Securities:

We look for the BoC to hike another 25bps to 5.00% in July. Upward revisions in the July MPR will provide the main catalyst for the hike, but we do expect a more balanced statement relative to June after some further erosion of sentiment. We also look for the Bank to leave its guidance open-ended, although we believe 5.00% will mark the terminal rate for the BoC.

The slide of the US dollar boosted the AUD/USD on Friday, which climbed to the 0.6700 area, a level that is relevant in the short-term for the pair. No key data is due from Australia next week. However, Chinese inflation on Monday and trade data on Thursday will be watched closely. Reserve Bank of Australia Governor Lowe will speak on Wednesday.

NZD/USD surged on Friday to test the 0.6220 area. The Reserve Bank of New Zealand will have its monetary policy meeting next Wednesday. It is expected to keep rates unchanged at 0.5%.