US dollar correction kicks in, AUD/USD firm ahead of CPI: Asian Open

The British pound was the strongest FX major on Tuesday after BOE’s chief economist said he’d “err on the side of caution for cutting bank rate”, sending GBP up against all of its major peers. Pill also warned that the latest official data showing a large fall in unemployment should not be taken at ‘fade value’, which is why the central bank is placing greater emphasis on service price inflation and wage growth over unemployment.

The pound had come under increasingly bearish pressure in recent days on bets of two rate cuts, beginning in August. Yet Pill’s comments allowed mean reversion to kick in and saw GBP/USD rise 0.8%, in line with my bullish, countertrend bias on Tuesday.

The US dollar began to retrace lower after failing to hold above 106. Which is encouraging as I have flagged a couple of times over the past week that the US 2-year bond found support at a historical level, which seemed to be capping yields at 5% and therefore raised the risks of a US dollar pullback.

WTI crude oil rallied in line with Tuesday’s bias and closed above $83, thanks to a weaker US dollar
Gold formed a bullish hammer at a 50% retracement level to suggest bullish mean reversion may kick in (but as for now, the bias is not for a break to new highs)
Wall Street indices rose for a second day ahead of earnings from big Tech
USD/JPY cautiously rose to a fresh 34-year high yet, for now at least, remains hesitant to tap the 155 handle ahead of a key US inflation report and BOJ meeting

Economic events (times in AEST)

11:30 – Australian quarterly and monthly CPI report
18:00 – German Ifo business survey
19:30 – US durable goods orders
22:30 – Canadian retail sales

Australia’s inflation report is the biggest event for currency traders in today’s APAC session. The RBA pay very close attention to the quarterly report given its established history, and as it is perceived to be more robust than the monthly report it is assumed more likely to prompt any policy action from the RBA.

Clearly what most want to see is a softer set of inflation figures to warrant a cut from the RBA sooner than later. Let looking through the data for CPI q/q, odds slightly favour a miss with 43.5% higher than estimates and 46.4% lower than estimate. Only 0.94% of the CPI q/q reads came in on estimate according to the data.

This has seen AUD/USD post negative average returns on CPI day, T+1 and T+2.
The strongest negative returns are T+2
Yet T+1 is the strongest negative median returns
The ASX 200 has averaged flat returns on CPI day and T+1
Although the ASX 200 has produced positive median returns on CPI day, T+1 and T+3

AUD/USD technical analysis:

The two-day rally for AUD/USD has seen the pair reach my upside target zone in the first half of the week, as anticipated. How much higher it climbs from here is now down to whether CPI data comes in stronger than expected and if the US dollar continues to correct. Given NZ inflation remains sticky and it tends to move in lockstep with Australia’s inflation, there’s a chance that today’s CPOI report won’t be enough to replenish dovish bets to materially weaken AUD/USD.

And with AUD/USD sitting in a resistance zone, my bias is neutral until the data arrives and we get a better feel for the US dollar’s direction. Ultimately, a soft CPI report coupled with USD strength could prove to be the high for AUD/USD and another crack at breaking below 64c. But unless we are treated to a broad risk-on environment, I suspect the upside potential for AUD/USD could be limited. And if AUD/USD does top out around current levels, it keeps the head and shoulders top in play which brings a move down to 63c onto the agenda.

View the full economic calendar

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.