US dollar is consolidated at a key trendline support ahead of US CPI

Financial markets retreated, but so did the US dollar and US yields remain around lower levels of late ahead of the release of the day's US July Consumer Price Index data in the New York open. The greenback was just above holding onto the 106 level overnight and is flat for the day so far in Asia. 

US CPI eyed

The US inflation data could be pivotal for the US dollar, although there will be another report before the next Federal Reserve meeting. Nevertheless, officials to pay close attention to core inflation this time around. ''A continuation of recent trends would be unwelcomed and likely tilt the Fed toward another substantive rate increase at the 20‑21 September FOMC meeting,'' analysts at ANZ Bank said:

''The consensus expectation anticipates headline inflation slowed to 0.2% MoM vs 1.3% Mom in June owing largely to weaker energy and food prices. That would see the annual rate of inflation ease slightly to 8.7% from 9.1% in June. Core inflation, however, is expected to remain sticky at 6.1% YoY (vs 5.9% in June) – still way in excess of the Fed’s 2.0% target. Core inflation, in particular, core services inflation which accounts for almost 60% of the CPI, must demonstrate signs of moderating before inflation can return sustainably to target.''

The data will follow recent job data in last week's Nonfarm Payrolls blockbuster outcome. This was highlighting solid wage growth and combined with the US productivity data that is highlighting another surge in labour costs, investors fear that this will complicate the Federal Reserve's efforts to control inflation. 

nevertheless, WIRP is now showing over 75% odds of a 75 bp hike at the September 20-21 FOMC meeting which would be expected to keep the greenback in the hands of the bulls. However, markets are still pricing in a quick turnaround by the Fed into an easing cycle in H1 2023, as analysts at Brown Brothers Harriman explained. ''It's pretty clear that the Fed doesn't see it that way and the data bear that out, at least for now.'' 

Beyond the CPI data and ahead of the September 20-21 FOMC meeting, the next big Fed event will be its Jackson Hole Economic Symposium scheduled for August 25-27. Fed Chairs often use this symposium in August to announce or hint at policy shifts ahead of the September FOMC meetings and the analysts at BBH explained that ''by late August, we will have seen all the major July data and some of the early August surveys such as the preliminary S&P Global PMI readings and regional Fed surveys.  The Fed will also have a good idea of how the economy is doing in Q3.  That said, we do not think the Fed will make any major policy announcements or paint itself into a corner ahead of next month’s FOMC meeting.''

US dollar technical analysis

This brings us to the technical picture for the US dollar. On the 4-hour time frame, the price is consolidated along a rising support line. If this were to break, then 105.05 is a key structure that guards a significant correction to the downside. On the upside, we have a greyed-out area of price imbalance as illustrated on the chart between 106.40 and near 108 the figure. Beyond there, 109.294 highs couldbe targetted and a break thereof could be blue skies for the greenback.