US Inflation Data Softens the Dollar Index, Yen Strengthens, and Gold Nears Highs (08.14.2024)

The dollar hovers around 102.6 as softer US producer inflation data raises expectations for Fed rate cuts, with EUR/USD eyeing the 1.1000 resistance. The yen strengthens past 146.5 per dollar, recovering from recent lows as traders adjust to the inflation outlook. Meanwhile, gold remains near record highs at $2,460 per ounce, supported by its safe-haven appeal amid easing inflation and geopolitical tensions. The GBP/USD pair drops as UK core inflation slows more than expected, raising the likelihood of Bank of England rate cuts. Dive into our analysis for more details on these market movements.

EUR/USD Eyes 1.1000 Resistance Amid Dollar Softness

The dollar index hovered around 102.6 on Wednesday, following a 0.5% decline in the previous session, as softer US producer price data raised expectations for Federal Reserve interest rate cuts. Investors are awaiting the July CPI report for confirmation that price growth is continuing to moderate. On Tuesday, US producer prices increased by 0.1% in July from the previous month, falling short of the anticipated 0.2% rise, and core producer prices remained unexpectedly flat. As a result, markets are now pricing in a higher likelihood of a 50-basis-point Fed rate cut in September and anticipate over 100 basis points of total easing this year. With the weakening dollar index, EUR/USD has started testing the 1.1000 resistance level once again.

In the pair, the first support level is at 1.0950. If this level is breached, the next supports to watch will be 1.0900 and 1.0850. On the upside, the first resistance is at 1.1000; if this level is surpassed, the next targets will be 1.1050 and 1.1100.

USD/JPY Faces 148.00 Resistance as Yen Gains on Softer US Inflation

The Japanese yen strengthened past 146.5 per dollar, recovering from over one-week lows as the dollar declined following softer US producer inflation data. This data increased expectations for more substantial interest rate cuts by the Federal Reserve. The figures raised optimism that upcoming US consumer inflation numbers might also show signs of easing price pressures in the world’s largest economy. Domestically, investors reviewed the latest Reuters Tankan survey, which indicated a slight decline in business sentiment among manufacturers in August due to weak demand from China. Traders also continued to evaluate the Bank of Japan's monetary policy amid recent market volatility and the unwinding of yen carry trades. A former BOJ official suggested that the central bank is unlikely to raise rates again this year due to financial market turbulence. Additionally, reports indicate that Prime Minister Fumio Kishida will not seek reelection as party leader in September.

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 levels to watch will be 144.00 and 141.70.

Softer US Inflation Data Improves Gold’s Safe-Haven Appeal

Gold eased to around $2,460 per ounce on Wednesday but remained near record highs, as new evidence of softer US inflation increased expectations for a larger interest rate cut by the Federal Reserve in September. Annual producer inflation slowed to 2.2% in July, down from 2.7% in June and approaching the Fed’s 2% target. Additionally, gold’s appeal as a safe-haven asset continues to attract investors amid escalating geopolitical tensions, including Iran’s potential retaliatory actions against Israel and Ukraine’s activities in Russia. Market participants are awaiting the US CPI data later in the day for further clues on inflation. Currently, the CME FedWatch Tool indicates a 50% probability of a 50-basis-point rate cut in September. Lower interest rates typically 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.

Pound Drops as UK Core Inflation Slows More Than Expected

The British pound fell to $1.28, retreating from the highest point after a three-week high reached earlier in the month. This was after UK inflation figures spurred speculation about a potential rate cut by the Bank of England. Annual inflation came in at 2.2%, aligning with expectations but falling short of projections. Services inflation dropped to 5.2%, its lowest in two years and below the Bank’s forecast of 5.6%. Core inflation also slowed more than anticipated. As a result, the likelihood of a 25 basis point rate cut in September increased to 47% from 36% before the data was released, with traders now anticipating two more quarter-point reductions by year-end. In contrast, earlier data showed unexpected strength in the labor market: the unemployment rate fell to 4.2% for the three months ending in June, contrary to predictions of an increase, while wage growth moderated to 5.4% from 5.8%, still slightly above the Bank of England’s forecast.

For GBP/USD, the initial support lies at 1.2790, followed by 1.2740 and 1.2700 below. On the upside, the first resistance is at 1.2880, with subsequent levels at 1.2950 and 1.3000 if the pair breaks above this resistance.