The Fed Chief sparked across the board selling of the USD when he left the door open for another round of quantitative easing, but it will be difficult for some FOMC members to support QE3 should US inflation continue to rise as was apparent in last month’s CPI data.
Today’s Key Economic Events:
EUR – CPI y/y – 09:00 GMT
Expectations: 2.7%. Previous: 2.7%.
EU inflationary pressures have been on the rise, thus the ECB has raised interest rates twice this year and another 25 bps of tightening is expected when Italy’s Mario Draghi takes over the helm of the ECB to solidify his inflation fighting credentials, much in the way his predecessor Jean-Claude Trichet has done. A rise in EU headline inflation would likely boost the euro from its recent lows in the crosses as traders price in another interest rate increase. EUR/GBP resistance is found at the broken trend line beneath the May and June lows at 0.8870.
USD – Unemployment Claims – 12:30 GMT
Expectations: 413K. Previous: 418K.
Last week’s dreadful NFP jobs report underlines the position of the Fed and Bernanke, “until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.” Therefore an additional drag on employment may bring further inflows to the safe-haven Japanese yen. The USD/JPY has recently moved below its trading range and could continue to fall towards its all-time low at 76.11.
USD – PPI m/m – 12:30 GMT
Expectations: -0.2%. Previous: 0.2%.
The Fed’s strategy with QE2 was to avoid a deflationary environment by creating a burst of inflation. Yesterday Bernanke left the door open for another round of quantitative easing which led to dollar selling across the board. However, given the CPI data from May that showed US CPI rising 3.6% y/y and core CPI climbing to 1.5%, it may be a tough sell to other FOMC members to enact another round of quantitative easing for fear of the Fed losing its grip on inflation and its reputation. EUR/USD support comes in at 1.4160 from the rising trend line on the hourly chart. Resistance is found at the 100-day moving average at 1.4280.
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