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Slowing Core Inflation, Deteriorating Consumer Sentiment, and Split Fed

It’s all about the consumers. After slowing core inflation and sharp deterioration in sentiment, Dollar took a steep dive towards the end of the week. Markets are suddenly less sure about a tapering announcement by Fed in September, not to mention anything concrete from Jackson Hole symposium later in the week. The greenback ended the week only slightly between than Sterling and Swiss Franc. The development suggests more downside in Dollar for the initial part of this week at least.

On the other hand, Yen rebounded strongly following the slide in treasury yields, even though US stocks extended the record runs. New Zealand Dollar follows as the second best, awaiting RBNZ rate hike this week. Canadian Dollar was the third winner. Euro and Aussie ended the week mixed.

Slowing core inflation, deteriorating consumer sentiment, and split Fed

Dollar’s rally firstly slowed after decline in core CPI in July from 4.5% yoy to 4.3% yoy, while headline CPI was unchanged at 5.4% yoy. The data added to the view that current inflation is “transitory”, or at least, it’s not accelerating for now.

Then, heavy selling was triggered on Friday by poor U of Michigan economic sentiment, which tumbled sharply from 81.2 to 70.2. That’s the lowest level since 2011. More importantly, the large scale decline was only exceeded by six occasions on record, all connected to sudden negative changes in the economy. While it’s just one data point, it raised concern over the course of the economy ahead with surging spread of Delta variant in the back ground.

Some Fed officials like Esther George, Robert Kaplan, Eric Rosengren were affirmative on announcing tapering in September, on condition of further strong improvement in job markets. But some like, Thomas Barkin and Raphael Bostic sounded cautious, probably thinking about making the decision in fall. Doves like Charles Evans would like to see a few more job report before deciding. While Mary Daly is expecting tapering later this year or early next.

10-year yield rejected by 55 day EMA, more range trading first

10-year yield rebounded further to 1.379 last week but retreated sharply after touching 55 day EMA, and closed at 1.297. The development suggests that TNX is not ready to confirm completion of the correction from 1.765 yet. Instead, it will extend the range trading between 1.128 and 1.420. That said , we don’t expect a break of 1.128 support, which is close to 50% retracement of 0.504 to 1.765 at 1.134, in case of another fall.

The break of 1.420 resistance would come likely come when Fed shows more confidence with a concrete plan of tapering. In that case, we’d likely see TNX head back towards 1.765 high as talks of a rate hike late next year heat up.

Dollar index failed 93.43 resistance, reversed to close lower

Dollar index edged higher to 93.19 last week but failed to break through 93.43 resistance, and reversed from there to close lower for the week at 92.51. Given that DXY is still sitting above rising 55 day EMA comfortably, we’d favor another rise for the near term. Break of 93.13/43 resistance zone will target 38.2% retracement of 102.99 to 89.20 at 94.46.

The fibonacci level at 94.46 will be important to determine the underlying trend. Strong break there would indicate that DXY is already in a medium term up trend, that would extend through 61.8% retracement at 97.72. However, failure there and (early) break of 91.78 support could bring another attempt below 90 handle before taking a committed direction.