Markets Show Caution Before the US Inflation Report, Yen Under Pressure (08.13.2024)

Global markets presented cautious optimism and uncertainty as traders awaited key economic data and central bank decisions. The dollar index remained steady at 103.1, with traders holding back significant moves before the US inflation data that could influence the Federal Reserve's next steps. The Japanese yen weakened, falling for the fifth time in six sessions, as uncertainty over the Bank of Japan's future rate hikes persisted despite ongoing inflationary pressures in Japan. Gold prices eased slightly below $2,470 per ounce but stayed near record highs, driven by its safe-haven appeal during escalating geopolitical tensions involving Israel and Ukraine. In the UK, payrolled employment increased by 24,000 in July, supporting a 20-pip rally in GBP/USD, with strong gains in the health and social work sector contributing to the overall employment growth. Markets are now focused on upcoming US inflation data, which could provide further direction for global currencies and commodities.

Dollar Index Holds Steady Before the US Inflation Data

The dollar index remained steady at around 103.1 on Tuesday as traders avoided making significant moves before key US inflation data this week, which could reveal whether price growth has continued to stabilize. US producer inflation data will be released later today, followed by consumer inflation figures on Wednesday and retail sales numbers on Thursday. Over the weekend, Fed Governor Michelle Bowman noted that despite softer inflation readings for May and June, inflation is still uncomfortably above the FOMC’s 2% target. As a result, markets have reduced their expectations for Federal Reserve rate cuts, now predicting a 25 basis point reduction in September rather than a more substantial 50 basis point cut. However, analysts still foresee over 100 basis points of total Fed easing this year. The dollar showed little change against most major currencies but continued to make slight gains against the yen as the unwinding of yen carry trades lost momentum.

In the pair, the first support level is at 1.0900. If this level is breached, the next supports to watch will be 1.0850 and 1.0800. On the upside, the first resistance is at 1.0960; if this level is surpassed, the next targets will be 1.1000 and 1.1050.

Japanese Yen Weakens as BoJ Rate Hike Uncertainty Persists

The Japanese yen weakened, falling to around 147.3 per dollar for the fifth time in six trading days. This decline was driven by a slowdown in yen carry trades and a strengthening US dollar, supported by positive economic indicators. This movement occurred despite Japanese data showing that producer prices for July increased the most in 11 months, signaling ongoing inflationary pressures. A former Bank of Japan official also suggested this week that the central bank may not raise interest rates again this year due to financial market instability. Last week, BoJ Deputy Governor Shinichi Uchida noted that the central bank would avoid raising rates in an unstable market. Additionally, the summary of opinions from the BoJ's July policy meeting indicated that some members advocated for continued rate hikes, with one suggesting that rates should eventually be raised to at least 1%.

The first resistance level is at 148.00. If this level is surpassed, the next targets will be 149.30 and 150.90. On the downside, the initial support is at 145.60; if this level is breached, the next support to watch will be 144.00 and 141.70.

Gold Under Pressure, Still Remains Near Record Peak

Gold prices eased below $2,470 per ounce on Tuesday, but remained near record highs, supported by its safe appeal during heightened geopolitical tensions. Israeli military strikes on Khan Younis on Monday resulted in at least 18 deaths and numerous injuries. Additionally, Ukrainian forces breached the Russian border last Tuesday, advancing into western Kursk and exposing vulnerabilities in Russian border defenses. Investors are closely watching for US producer price data today and consumer price figures on Wednesday for further insights into inflation and indications about the Federal Reserve’s monetary policy. While expectations for a Fed rate cut in September remain intact, there is now debate over whether the reduction will be 50 basis points or a more modest 25 basis points. Lower interest rates generally increase the attractiveness of non-interest-bearing assets like gold.

In gold, the first support level is at 2,450. If this level is breached, the next supports to watch will be 2,430 and 2,412. On the upside, the initial resistance is at 2,475; if this level is surpassed, the next targets will be 2,450 and 2,500.

UK Employment Up 24,000 in July, Supporting GBP/USD

In July 2024, the number of payrolled employees in the United Kingdom increased by 24,000 to reach 30.4 million, following a revised gain of 14,000 the previous month. Year-on-year, payrolled employment grew by 0.8% or 252,000, largely due to a rise in the health and social work sector, which added 163,000 positions. Regionally, the largest annual increase in payrolled employment occurred in Ards and North Down, with a growth rate of 2.9%, while Westminster saw the biggest decline at -2.6%. Additionally, the median monthly pay rose by 5.6% to £2,396. The highest pay increase was seen in the other service activities sector at 8.4%, whereas the public administration and defense sector experienced the largest decrease at -2.4%. With this economic data, GBP/USD has rallied approximately 20 pips.

For GBP/USD, the initial support lies at 1.2740, followed by 1.2650 and 1.2600 below. On the upside, the first resistance is at 1.2820, with subsequent levels at 1.2880 and 1.2950 if the pair breaks above this resistance.