Forex markets eye US inflation
The US dollar headed south in early New York trading as US bond yields fell once again. However, those losses were quickly recouped and most major currencies, along with the dollar index, finished the day barely changed. They remained almost unchanged in Asia, and currency markets were clearly on hold until today’s US data.
The dollar index finished unchanged at 90.13 overnight, edging higher to 90.17 this morning in directionless trade. Similarly, both the EUR/USD and GBP/USD were almost unchanged at 1.2170 and 1.4120 this morning.
EUR/USD was trading in a wider 1.2100 to 1.2250 range this past fortnight, while GBP/USD had clear support and resistance at 1.4100 and 1.4250. In the bigger picture, only failure of 1.2100 and 1.4100 respectively undermine the longer-term bullish outlook for both currencies.
Today’s ECB meeting is highly unlikely to impact either currency unless the ECB springs a major tapering surprise.
The PBOC Governor has boosted the yuan this morning after an almost unchanged PBOC USD/CNY fix. Among a plethora of comments, Governor Yi said CPI growth would ease back below 2.0%. He also hinted that the PBOC might loosen its grip on the yuan via adjustments to the basket mechanism.
However, his comments that the PBOC will keep the yuan stable at reasonable levels will limit the gains by the yuan. At 6.3850, the USD/CNY is at the lower end of its range for the week, and a test of 6.3500 is only likely to happen this week if a very weak US CPI number prompts a US dollar sell-off.
It is noteworthy that US longer-dated yields have fallen to lows not seen since Q3 last year. With financial markets at multi-month highs, either the street thinks the inflation story is overdone, or there is a severe degree of complacency out there.
US data over the past two months has not confirmed the story one way or the other. With that in mind, it will be interesting to see how the markets react to the inflation data.