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US CPI set to fall to 3%, Bank of Canada to hike again?

European markets saw another positive session yesterday, rising for the third day in a row in anticipation that China’s efforts to support its property sector may translate into further measures to support a rebound in economic activity. The FTSE100 once again underperformed as the strong pound and weakness in pharmaceuticals acted as a drag.  

US markets also closed higher on optimism that today’s CPI report wouldn’t spring any unpleasant surprises. This positive finish looks set to see markets here in Europe open slightly higher in a couple of hours’ time.

US inflation appears to be heading in the right direction, after sliding to a 2-year low last month of 4%, from 4.9% in April. A year ago, US CPI hit its peak at 9.1%. Core prices have continued to look sticky slipping back to 5.3% from 5.5%, however the continued hawkishness of the Federal Reserve has seen the slide in yields that came about because of these numbers, reverse sharply.

With another rate rise due later this month this week’s CPI numbers won’t impact how the Federal Reserve is likely to act in 2 weeks’ time, but the numbers might shine a light in whether we can expect another rate hike in September. June CPI is expected to slow further to 3.1% and core prices to slow to 5%.

Having decided to signal a pause in their recent rate hiking cycle when they hiked rates in January, the Bank of Canada surprised markets in June by deciding to hike rates again, by 25bps to 4.75%. The decision followed a similar decision by the RBA days before on concerns that inflation was proving to be much stickier than feared.

The Bank of Canada also tweaked its guidance about the need for further rate hikes giving them more flexibility when it comes to raising rates or choosing to hold them.

Any decision could well be tempered by the current business outlook which in Q2 fell to its lowest levels since Q3 of 2020, although last week’s June jobs report was strong, which could prompt the central bank to hike again by another 25bps to 5%.

Core inflation did slow to 3.9% in May from 4.3% in April but remains elevated, and with the Fed likely to hike in two weeks’ time it’s quite likely the BoC will want to get out in front of them. 

The Japanese yen has been one of the big movers in recent days on speculation that the Bank of Japan may start to look at tweaking its yield curve control policy, when it next meets at the end of the month.       

EUR/USD – looks set for a move towards the range highs at 1.1100. Support remains back at least week’s lows at 1.0830. Below 1.0820 targets 1.0780.

GBP/USD – continues to move higher as we look to extend to fresh 15-month highs, and the 1.3010/20 area. A move through 1.3020 signals potential for 1.3200. Main support at 1.2680 area.  

EUR/GBP – sliding towards the 0.8500 area, with a break below potentially targeting 0.8460. Resistance remains back at the highs this week at the 0.8570/80 area. We also have resistance at the 50-day SMA which is now at 0.8620.

USD/JPY – slid below the 50-day SMA at 140 which washe next support for the US dollar, and could well extend to the 138.50 area and cloud support. Last weeks’ weekly reversal suggests that a short-term top is now in. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.

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