Week Ahead: Dollar top in focus ahead of US CPI data

Updated July 8, 2022

The greenback advanced higher over 2% this week as the recent upside pressure on a technical basis proved too much. Concerns that the global economy is sleepwalking into a recession as interest rates are front-loaded and poised to go higher have been pushing nervy investors into the safety of the world’s reserve currency. The escalating European gas crisis also hit the single currency especially.

Friday’s hot jobs report bolstered the chances of another 75bp rate hike at the Fed’s next meeting in a few weeks. The tight labour market along with inflation set to run more than four times the 2% target will underpin support for the greenback. Indeed, US CPI is probably the single most important data release on the calendar next week. Energy, food and housing are expected to all contribute to higher prices, with the annual rate moving up to 8.9% from 8.6%. Core CPI is forecast to see another 0.6% m/m increase, taking the annual rate down slightly below 6%.

High inflation readings should continue to weigh on sentiment and also consumer confidence. The latter is forecast to be seen in the University of Michigan survey, one cited by Fed Chair Powell no less, which is set to remain at a low level. Falling stock markets and the rising cos of living are hurting.

Two central bank meetings should continue the rate hiking narrative with the Bank of Canada set to raise rates by 75bps to 2.25% after May’s inflation saw a major upside surprise. Guidance is expected to be hawkish too with larger moves hopefully taming domestic demand and bringing down inflation. The economy is growing strongly with record employment levels and a red-hot housing market. That said, Canada’s robust commodity background should mean it is far more resilient than most other major economies to this spike in prices.

The RBNZ is the other major central bank to meet. Policymakers are expected to deliver a 50bp rate rise with the economy continuing to hum along. The bank needs to carry through with the hikes it has signalled or risk letting inflation pressures get out of control. The kiwi has been in the dumps recently on poor global risk sentiment so needs to keep the recent low at 0.6124 as support or risk further losses.

Major risk events of the week

12 July 2022, Tuesday:

-German ZEW Survey: Analysts forecast expectations to worsen further from the -28 print seen in June. Overall business sentiment remains depressed amid higher prices and financial market uncertainty. Confidence is now on a par with the pandemic lows.

13 July 2022, Wednesday:

RBNZ Meeting: The market expects the bank to raise rates by another 50bps to 2.5%. Recent developments have been mixed with near-term inflation still running hot. But the risks of a global slowdown have increased and there are early anecdotal signs of a cooling in domestic activity.

US CPI: Consensus expects a m/m reading of 1.1% and a y/y print of 8.8% in June. Core inflation may slow from 6%. Price pressures are broad based with energy, food and shelter continuing to rise. Elevated prices are expected to weigh on sentiment further.

Bank of Canada Meeting: Policymakers are set to raise rates by 75bps and give guidance for another large move at the next meeting two months from now. A strong fundamental backdrop in the form of yields, commodities and economic growth should help support the Canadian dollar.

14 July 2022, Thursday:

-Australia Jobs: The market median is for 30k job gains and the unemployment rate to remain unchanged at 3.8%. Average employment growth over the past three months continues to be stronger than the pre-pandemic trend. Labour demand remains robust with job vacancies very high.

15 July 2022, Friday:

-China GDP: Consensus expect a reading of 1.0%, down from the first quarter print of 4.8%. Covid lockdowns have weighed on activity, especially in the country’s more developed regions. Consumption took a greater hit and pre-emptive containment measures led to concerning supply-chain disruptions.

US Retail Sales: Analysts forecast a reading of 0.9% in June from the prior -0.3%. That was the first drop in sales in five months. Going forward, higher rates and inflation are expected to impact spending capacity and hurt demand. On the flip side, high personal savings and strong job and wage growth are helping.

The greenback advanced higher over 2% this week as the recent upside pressure on a technical basis proved too much. Concerns that the global economy is sleepwalking into a recession as interest rates are front-loaded and poised to go higher have been pushing nervy investors into the safety of the world’s reserve currency. The escalating European gas crisis also hit the single currency especially.

Friday’s hot jobs report bolstered the chances of another 75bp rate hike at the Fed’s next meeting in a few weeks. The tight labour market along with inflation set to run more than four times the 2% target will underpin support for the greenback. Indeed, US CPI is probably the single most important data release on the calendar next week. Energy, food and housing are expected to all contribute to higher prices, with the annual rate moving up to 8.9% from 8.6%. Core CPI is forecast to see another 0.6% m/m increase, taking the annual rate down slightly below 6%.

High inflation readings should continue to weigh on sentiment and also consumer confidence. The latter is forecast to be seen in the University of Michigan survey, one cited by Fed Chair Powell no less, which is set to remain at a low level. Falling stock markets and the rising cos of living are hurting.

Two central bank meetings should continue the rate hiking narrative with the Bank of Canada set to raise rates by 75bps to 2.25% after May’s inflation saw a major upside surprise. Guidance is expected to be hawkish too with larger moves hopefully taming domestic demand and bringing down inflation. The economy is growing strongly with record employment levels and a red-hot housing market. That said, Canada’s robust commodity background should mean it is far more resilient than most other major economies to this spike in prices.

The RBNZ is the other major central bank to meet. Policymakers are expected to deliver a 50bp rate rise with the economy continuing to hum along. The bank needs to carry through with the hikes it has signalled or risk letting inflation pressures get out of control. The kiwi has been in the dumps recently on poor global risk sentiment so needs to keep the recent low at 0.6124 as support or risk further losses.

Major risk events of the week

12 July 2022, Tuesday:

-German ZEW Survey: Analysts forecast expectations to worsen further from the -28 print seen in June. Overall business sentiment remains depressed amid higher prices and financial market uncertainty. Confidence is now on a par with the pandemic lows.

13 July 2022, Wednesday:

RBNZ Meeting: The market expects the bank to raise rates by another 50bps to 2.5%. Recent developments have been mixed with near-term inflation still running hot. But the risks of a global slowdown have increased and there are early anecdotal signs of a cooling in domestic activity.

US CPI: Consensus expects a m/m reading of 1.1% and a y/y print of 8.8% in June. Core inflation may slow from 6%. Price pressures are broad based with energy, food and shelter continuing to rise. Elevated prices are expected to weigh on sentiment further.

Bank of Canada Meeting: Policymakers are set to raise rates by 75bps and give guidance for another large move at the next meeting two months from now. A strong fundamental backdrop in the form of yields, commodities and economic growth should help support the Canadian dollar.

14 July 2022, Thursday:

-Australia Jobs: The market median is for 30k job gains and the unemployment rate to remain unchanged at 3.8%. Average employment growth over the past three months continues to be stronger than the pre-pandemic trend. Labour demand remains robust with job vacancies very high.

15 July 2022, Friday:

-China GDP: Consensus expect a reading of 1.0%, down from the first quarter print of 4.8%. Covid lockdowns have weighed on activity, especially in the country’s more developed regions. Consumption took a greater hit and pre-emptive containment measures led to concerning supply-chain disruptions.

US Retail Sales: Analysts forecast a reading of 0.9% in June from the prior -0.3%. That was the first drop in sales in five months. Going forward, higher rates and inflation are expected to impact spending capacity and hurt demand. On the flip side, high personal savings and strong job and wage growth are helping.

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