Inflation On Watch

All eyes are on the US Dollar today as traders await the June CPI print this afternoon. On the numbers front, the market is looking for headlines annualised CPI to cool to 3.8% from 4.2% prior with core CPI also expected to soften to 2.8% from 2.9% prior. There has been plenty of focus on the inflation outlook and Fed tightening expectations amidst the recent drop in oil prices, with some players arguing that traders have turned too aggressively hawkish in their Fed outlook. Current market pricing for a hike by year end is around 90%. As such, there is plenty of room for a dovish repricing if today’s data confirms a drop in inflation, especially if we see a larger-than-forecasted decline. In that scenario, pricing should come off quite sharply, leading USD firmly lower. On the other hand, if inflation comes in above forecasts today, that should keep tightening expectations entrenched and USD underpinned through the middle of the week.

Middle East Impact

Away from US inflation, it looks like the backdrop is turning more bullish for USD again regarding developments in the Middle East. A fresh wave of fighting between the US and Iran has stoked investor uncertainty and is driving oil prices higher once again. Crude futures are up almost 13% this week now up almost 20% off the July lows as supply disruptions intensify again and traders fear a worse escalation of the conflict. If oil continue to rebound higher here, USD should start to follow it north again as the inflation outlook turns more hawkish once again.

Technical Views

DXY

For now, DXY remains within the upper part of the bull channel but is capped for now by the 101.91 level. Still, while price holds above the 100.18 level, focus is on a fresh push higher with 103.20 the next bull target. If we turn lower, 99.15 and the bull channel lows will be key support to watch.