Dollar slides as mixed U.S. data highlights uncertain path

The dollar dropped to a three-week low in choppy trading on Friday, as investor concerns about recession outweighed inflation worries, for now, amid a mixed batch of economic data.

There was also a lot of month-end position-squaring, analysts said.

Earlier, U.S. economic numbers showed that inflation continued its red-hot rise in June, keeping the Federal Reserve on track to raise interest rates as aggressively as it deems necessary.

The personal consumption expenditures (PCE) price index jumped 1.0% last month, the largest increase since September 2005 and followed a 0.6% gain in May. In the 12 months through June, the PCE price index advanced 6.8%, the biggest gain since January 1982.

Excluding the volatile food and energy components, the PCE price index shot up 0.6% after climbing 0.3% in May.

The dollar initially rose on the inflation numbers, but gains fizzled amid the final University of Michigan report showing consumers' inflation expectations slipped in July.

Federal Reserve Chairman Jerome Powell had mentioned the Michigan survey last month as key behind the pivot to the more aggressive rate posture.

The greenback was also partly weighed down by data showing the Chicago manufacturing index falling to a 23-month low of 52.1 from a prior low of 56.0, according to Action Economics.

In afternoon trading, the dollar index, a measure of its value against six major currencies, slid 0.3% to 105.89. Earlier, it slid to a three-week trough of 105.53.

"Traders are engaging in some quarter-end position-squaring, preparing for a period in which inflation and growth rates subside, tilting interest differentials against the dollar," said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.

"Next week's (U.S.) jobs report looms as a potential volatility catalyst, and no one wants to be caught offside if job creation slows more than expected," Schamotta added.

Another key indicator, the U.S. employment cost index (ECI), also increased. The ECI, the broadest measure of labor costs, rose 1.3% last quarter after accelerating 1.4% in the January-March period, the Labor Department said on Friday.

The index is widely viewed as one of the better gauges of labor market slack and a predictor of core inflation.

Action Economics, in its blog after the U.S. data, said the ECI was one of the metrics that alarmed the Fed and caused its pivot to a 75 basis points hike.

Post-data on Friday, rates futures markets have priced in a 72% chance of a 50 basis points hike at the Fed's September policy meeting, with a 28% probability of a 75-bps rate increase. .

The rates markets also predict that the fed funds rate will peak in February 2023. Pre-U.S. data, futures were betting that top in the fed funds rate would hit this December.

The euro rose 0.2% versus the dollar to $1.0213.

Against the yen, the dollar slid 0.7% to 133.42 yen. The greenback also posted its largest monthly percentage fall since July 2020.

The yen was the primary short bet of the widening interest rate differential trade between the United States and its global peers, with net shorts on the currency, despite a recent pullback, above historical averages at $5.4 billion.

WANT TO DIRECT TALK OUR MARKET EXPERT CONTACT MONEY LIFE RESEARCH

Oil prices rise as chances of OPEC+ supply boost dim

Oil prices rose in European trading on Friday as attention turned to next week's OPEC+ meeting and expectations that it will dash U.S. hopes for a supply boost.

Brent crude futures for September settlement, due to expire on Friday, gained $2.30 to trade at $109.44 a barrel by 1200 GMT after touching their highest since July 5. The more active October contract was up $2.24 at $104.07.

U.S. West Texas Intermediate (WTI) crude futures rose $2.20 to $98.62 a barrel.

Both contracts are set for a second monthly loss, however, down 4.7% and 6.8% respectively.

A weaker dollar and stronger equities also lent support on Friday. A fall in the dollar makes oil cheaper for buyers with other currencies.

Global equities, which often move in tandem with oil prices, were up on the hope that U.S. monetary tightening would not be as hawkish as initially expected after disappointing growth figures. [MKTS/GLOB]

A Reuters survey forecast Brent and U.S. crude would average $105.75 and $101.28 a barrel respectively this year. [OILPOLL]

Front-month Brent futures are selling at a rising premium to later-loading months in a market structure known as backwardation, indicating tight current supply.

"The oil market in Europe is considerably tighter than in the U.S., which is also reflected in the sharply falling Brent forward curve," said Commerzbank (ETR:CBKG) analyst Carsten Fritsch.

A key driver will be the next meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, together known as OPEC+, on Aug. 3.

OPEC+ sources said the group will consider keeping oil output unchanged for September, with two OPEC+ sources saying a modest increase would be discussed.

A decision not to raise output would disappoint the United States after U.S. President Joe Biden visited Saudi Arabia this month hoping to strike a deal to open the taps.

Analysts, however, said it would be difficult for OPEC+ to boost supply, given that many producers are already struggling to meet production quotas.

WANT TO DIRECT TALK WITH OUR EXPERT, REGISTER MONEY LIFE RESEARCH

When is the Advance US Q2 GDP report and how could it affect EUR/USD?

US Q2 GDP Overview

Thursday's economic docket highlights the release of the Advance second-quarter US GDP report, at 12:30 GMT. Having contracted by 1.6% in the previous quarter, the world's largest economy is expected to return to growth and narrowly avoided a so-called 'technical' recession. GDP likely grew at a meagre 0.3% annualized pace during the April-June period, though some economists anticipate a drop in activity for the second successive quarter.

According to Valeria Bednarik, Chief Analyst at FXStreet, “Macroeconomic data points to heightened downward risks for the economy, particularly figures linked to the last half of the quarter, as spending retreated sharply.”

How Could it Affect EUR/USD?

Ahead of the key release, the US dollar stages a goodish rebound from its lowest level since July 6 touched earlier this Thursday. A stronger GDP print would be enough to reinforce expectations that the Fed would still hike 50 bps at each meeting in the remainder of this year. This would be enough to provide a fresh lift to the greenback and force the EUR/USD pair to prolong its intraday retracement slide from the 1.0235 region.

Conversely, a weaker reading would add to growing market worries about an economic downturn. This might continue to weigh on investors' sentiment and offer support to the safe-haven greenback. Apart from this, concerns about an energy crisis in the Eurozone suggest that the path of least resistance for the EUR/USD pair is to the downside.

Eren Sengezer, Editor FXStreet, outlined important technical levels to trade the EUR/USD pair: “The Fibonacci 38.2% retracement level of the latest downtrend forms strong resistance at 1.0230, which is also the upper limit of the 10-day-old trading range. With a four-hour close above that level, the pair could target 1.0300 (psychological level, Fibonacci 50% retracement) and 1.0320 (200-period SMA on the four-hour chart).”

“On the downside, 1.0200 (50-period SMA, psychological level) aligns as initial support before 1.0150 (Fibonacci 23.6% retracement, 100-period SMA) and 1.0100 (psychological level, static level),” Eren added further.

WANT TO DIRECT TALK TO OUR EXPERT TEXT NOW: MONEY LIFE RESEARCH

Gold Price Forecast: XAUUSD surrenders intraday gains amid modest USD strength

Gold price struggles to preserve its modest intraday gains amid the emergence of some USD buying.

The prospects for a more aggressive major central banks also acted as a headwind for the metal.

The downside seems limited ahead of this week’s key US macro releases and the FOMC decision.

Gold price attracted some selling near the $1,728 region on Tuesday and retreated to the lower end of its daily range during the first half of the European session. The XAUUSD was last seen trading just below the $1,720 level, nearly unchanged for the day.

The US dollar staged a goodish rebound from the vicinity of its lowest level since July 5 touched the previous day, which, in turn, acted as a headwind for the dollar-denominated gold. This, along with the prospects for a more aggressive move by major central banks to curb soaring inflation, was seen as another factor weighing on the non-yielding yellow metal.

Gold price struggles to preserve its modest intraday gains amid the emergence of some USD buying.

The prospects for a more aggressive major central banks also acted as a headwind for the metal.

The downside seems limited ahead of this week’s key US macro releases and the FOMC decision.

Gold price attracted some selling near the $1,728 region on Tuesday and retreated to the lower end of its daily range during the first half of the European session. The XAUUSD was last seen trading just below the $1,720 level, nearly unchanged for the day.

The US dollar staged a goodish rebound from the vicinity of its lowest level since July 5 touched the previous day, which, in turn, acted as a headwind for the dollar-denominated gold. This, along with the prospects for a more aggressive move by major central banks to curb soaring inflation, was seen as another factor weighing on the non-yielding yellow metal.

WANT DIRECT TALK WITH OUR SENIOR EXPERTS, VISIT MONEY LIFE RESEARCH

EUR/USD Price Analysis: Further consolidation appears in store

EUR/USD remains within a consolidative mood near 1.0250.

Extra side-lined trade appears favoured in the near term.

EUR/USD fades the initial pessimism and refocuses on the upper end of the recent range near 1.0260.

The current consolidative mood carries the potential to extend further, at least until the FOMC meeting due later in the week. The upside should remain limited by the weekly high around 1.0280, while the low-1.0100s are expected to hold the downside for the time being.

In the meantime, the pair is expected to remain under downside pressure while below the 5-month support line around 1.0490.

In the longer run, the pair’s bearish view is expected to prevail as long as it trades below the 200-day SMA at 1.0991.

Want to direct talk to our experts, Join now: MONEY LIFE RESEARCH

Gold Futures: Upside looks limited

Open interest in gold futures markets dropped by around 9.6K contracts on Thursday according to preliminary readings from CME Group. Volume, instead, went up for the second session in a row, this time by around 87.4K contracts.

Gold looks supported around $1,680

Thursday’s moderate rebound in prices of the ounce troy of gold was on the back of decreasing open interest, leaving the prospects for further upside somewhat diminished. On the upside, there is a strong support around the $1,680 region, where also converges the 2021 low.

Get chance to connect with our experts!
JOIN NOW:MONEY LIFE RESEARCH

Far from certain new UK PM could alter gloomy tone weighing on GBP – Rabobank

Commenting on the potential impact of the latest UK political developments on the British pound, Rabobank analysts argued the new British prime minister will be unlikely to substantially alter the gloomy tone that has been weighing on the GBP.

BoE’s mandate may have to be re-examined

"While tax hikes would boost demand, they could also create further inflation and counter the current policy tightening efforts of the BoE.  This could mean further rate rises from the BoE then would otherwise be the case, which would sap the growth potential that Truss hopes to create. "

"Truss at the weekend indicated that the BoE’s mandate may have to be re-examined.  She suggested that Japan may be able to provide examples of best practices.  This, however, only served to highlight how unaware Truss is of the deflation and growth issues that have plagued the BoJ for decades.  Additionally, any further signs from Truss that she could move to reduce the BoE’s independence will not be welcomed by GBP investors given fears that she may make the Bank a lackey to vote-winning government policies."

"Given our expectation that USD strength is likely to persist for around 6 months or so in view of risks to global growth, we foresee the potential for further sharp drops in the value of the pound.  We have revised lower our target for cable from 1.18 and see the potential for a dip to levels as low as 1.12 on a 1-to-3-month view.  The assumes a more sustained break below EUR/USD1.00."

WANT TO DIRECT TALK WITH OUR EXPERTS, CONTACT MONEY LIFE RESEARCH