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I. Market focus:
A relative calm prevailed in the foreign exchange markets at the beginning of Thursday's session due to scanty news flow, and the main currency pairs traded in narrow ranges. In the morning, the U.S. dollar remained near the previous day's highs and managed to refresh its highs against the yen. The dollar is supported by the expectations of further monetary-policy tightening by the Fed, which may accelerate the pace of interest rate hikes. These expectations were fueled by the comments of Chicago Federal Reserve Bank President Charles Evans, considered one of the Fed's most dovish policymakers. Evans praised the U.S. economy's strength and supported more tightening this year. In addition, the dollar’s growth was heated by the data on wholesale trade and the producer price index, which turned out to be better than expected. The data on the U.S. consumer price index, set to be released later today (12:30 GMT), may provide additional support to the dollar. Recently, there has been an increase in inflationary pressures in the U.S., and the imposition of tariffs for imports from China only fuels this process. Therefore, speculation that the Fed may accelerate the pace of its monetary policy tightening is not unfounded, suggesting a quite optimistic outlook for the dollar.
The U.S. inflation data will be the main scheduled event of the day. In addition, investors will pay attention to the release of the minutes of the ECB's latest meeting (11:30 GMT) and New Zealand’s data on activity in the manufacturing sector (22:30 GMT).
II. The market highlights are:
The Labor Department reported on Wednesday the U.S. producer-price index (PPI) rose 0.3 percent m-
The Bank of Canada (BoC) announced Wednesday that it decided to hike its benchmark interest rate by 0.25 basis points to 1.50, as most economists expected. In its statement, the BoC cited that the economy is operating close to capacity and, as a result, CPI inflation is expected to edge up further to about 2.5 percent before settling back to 2 percent by the second half of 2019. The Bank also noted that the housing market is stabilizing, commodity prices are starting to rise, and business investment is growing in response to solid demand growth and capacity pressures. At the same time, the regulator warned that mounting trade tensions might have a larger impact on investment and exports than previously projected. Nonetheless, the Bank said it expects that higher interest rates will be warranted to keep inflation near its target and will continue to take a gradual approach, guided by incoming data.
The U.S. Energy Information Administration (EIA) revealed on Wednesday that crude inventories fell by 12.6 million barrels to 405.2 million barrels in the week ended July 6. That represented the biggest fall since September 2016. Economists had forecast a decrease of 4.489 million barrels. At the same time, gasoline stocks dropped by 700,000 barrels to 239 million barrels, while analysts had expected a decrease of 800,000 barrels. Distillate stocks rose by 4.1 million barrels to 121.7 million barrels last week, while analysts had forecast a gain of 800,000 barrels. Meanwhile, oil production in the U.S. was unchanged at 10.900 million barrels per day. U.S. crude oil imports averaged 7.4 million barrels per day last week, down by 1,624,000 barrels per day from the previous week.
III. Market Situation
The currency pair EUR/USD rose slightly, correcting after the yesterday's drop, which was caused by the broad strengthening of the U.S. dollar on expectations of a faster pace of the Fed rate rises. Investors are now awaiting the release of the U.S. CPI data for June, which can provide additional support to the dollar. According to economists’ forecasts, headline CPI in June rose by 0.2 percent m-o-m and by 2.9 percent y-o-y, while the core CPI increased by 0.2 percent m-o-m and 2.3 percent y-o-y. Resistance level - $1.1790 (high of July 9). Support level - $1.1630 (low of July 4).
The currency pair GBP/USD dropped slightly at the beginning of the session, updating yesterday's low, but then recovered to the opening level amid partial profit-taking by investors. The pound, however, continued to be pressured due to political turmoil in the UK, as the opponents continue to undermine Prime Minister Theresa May's rule. Tomorrow, May will meet with the U.S. President Trump, who arrives in the UK this afternoon for a two-day working visit. The head of the British government said that she expects the visit will be an opportunity to expand trade relations and strengthen cooperation on security between the U.S. and the U.K. With an almost empty economic calendar in the UK ahead, traders will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3363 (high of July 9). Support level - $1.3094 (low of July 2).
The currency pair AUD/USD traded moderately higher, due to partial profit-taking after yesterday's significant fall, triggered by concerns of a full-scale trade war between the United States and China. Yesterday, the Trump administration’s announced plans to impose additional tariffs on $200 billion in Chinese goods. China called the U.S. actions "completely unacceptable” and vowed to respond with matching countermeasures. The pair’s performance was also somewhat influenced by the Australian data, which revealed that consumer inflation expectations declined this month. According to Melbourne Institute, the expected inflation rate fell to 3.9 percent in July from 4.2 percent in June. Resistance level - AUD0.7483 (high of July 9-10). Support level - AUD0.7310 (low of July 2).
The currency pair USD/JPY continued its yesterday's rally, approaching its high of January 10. The U.S. dollar rose amid escalating U.S.-China trade conflict and expectations of further monetary-policy tightening by the Fed. Some market participants are concerned that the new tariffs will lead to an increase in the prices for consumer goods in the U.S. and will force the Federal Reserve to hike interest rates faster. Today, the focus of market participants will be on the U.S. consumer price index (CPI), which can provide additional support to the dollar. Resistance level - Y113.00 (high of January 9). Support level - Y110.76 (low of July 11).
U.S. stock indexes closed lower on Wednesday, as the U.S. threat to impose tariffs on an additional $200 billion worth of Chinese goods raised fears of an escalating trade war. Investors also assessed the June data on producer price index (PPI) and May wholesale inventories. The Labor Department reported the U.S. producer-price index (PPI) rose 0.3 percent m-o-m in June, following an unrevised 0.5 percent m-o-m gain in May. For the 12 months through June, the PPI surged 3.4 percent compared to a 3.1 percent increase recorded in the prior month. That was the highest rate since November 2011. Economists had forecast the headline PPI would rise 0.2 m-o-m last month and 3.2 percent over the past 12 months. Excluding volatile prices for food and energy, the PPI rose 0.3 percent m-o-m and 2.8 percent over 12 months, while economists forecast gains of 0.2 percent and 2.6 percent, respectively. Meanwhile, the Commerce Department said that wholesale inventories increased 0.6 percent in May, following a 0.1 percent uptick in April. Economists had forecast a 0.5 percent advance.
Asian stock indexes closed higher on Thursday, correcting after a bruising sell-off a day earlier, which was triggered by the U.S. threats of new tariffs on another $200 billion in Chinese imports.
European stock indexes are expected to trade mixed in the morning trading session.
Yields of US 10-year notes hold at 2.86% (-1 basis points)
Yields of German 10-year bonds hold at 0.31% (0 basis points)
Yields of UK 10-year gilts hold at 1.30% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in August settled at $70.80 (+0.60%). The crude oil prices rose moderately, correcting after yesterday's 4.7 percent decline, which was caused by the news from Libya and OPEC data. Libya's National Oil Corporation (NOC) said on Wednesday it resumed oil exports from the country's eastern ports. Meanwhile, OPEC raised its forecast for oil production in the U.S. in 2018 by 20,000 barrels per day to 10.53 million barrels per day. Investors also continued to digest the latest data from the U.S. Energy Information Administration (EIA), which revealed that crude inventories fell by 12.6 million barrels to 405.2 million barrels in the week ended July 6. That represented the biggest fall since September 2016. Economists had forecast a decrease of 4.489 million barrels. At the same time, gasoline stocks dropped by 700,000 barrels to 239 million barrels, while analysts had expected a decrease of 800,000 barrels. Distillate stocks rose by 4.1 million barrels to 121.7 million barrels last week, while analysts had forecast a gain of 800,000 barrels. Meanwhile, oil production in the U.S. was unchanged at 10.900 million barrels per day.
Gold traded at $1,242.50 (+0.05%). Gold prices edged up, due to due to partial profit-taking after yesterday's decline, and correction of the U.S. dollar. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell 0.02 percent to 94.70. Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies. In addition, market participants await the U.S. report on consumer price index (CPI), set to be released later today. If the indicator is higher than expected, the dollar probably will grow, while the gold prices will continue to show declines in the short-term perspective.
IV. The most important scheduled events (time GMT 0)
BOE Credit Conditions Survey
ECB Monetary Policy Meeting Accounts
New Housing Price Index
Continuing Jobless Claims
Initial Jobless Claims
CPI excluding food and energy, m/m
FOMC Member Harker Speaks
Business NZ PMI
|remaining time till the new event being published|
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