*USD rose to a two-week high before pulling back
*US stocks snapped a five-day losing streak
*AUD falls on continued dovish RBA Lowe comments
*UK unemployment rate falls to 4.6% as forecast, vacancies at record highs
USD rose to a two-week peak at 92.88 before closing marginally lower on the day. Expectations increased that the Fed could reduce its asset purchases by the end of the year, despite Covid-19 cases. EUR ended just above 1.18 and the 50-day SMA. GBP is little changed above its 200-day SMA. Commod-$s outperformed boosted by higher energy prices. CAD gained 0.4% though gave back gains into the close. AUD is close to breaking down after dovish comments by Lowe questioned market pricing of rate hikes.
US equities closed higher with the Dow leading the gains +0.8%. The broader S&P500 swung between gains and losses before closing up 0.2%. The Nasdaq underperformed closing modestly lower -0.1%. The prospect of a tax hike from 21% to 26.5% is a key focal point. The positive tone continues this morning with most Asian markets higher. The Nikkei briefly traded at a 31-year high while China’s tightening grip on its tech firms is being watched. European and US futures are in the green.
Market Thoughts – US CPI in focus
As we enter the Fed’s blackout period ahead of next week’s meeting, all eyes will be on today’s inflation data. Economists expect the annual figure to ease slightly to 4.2% from 4.3% in July. The core m/m is set to rise to 0.3% in August. Prices were up 0.3% the previous month and 0.9% in June.
Re-opening frictions are slowly fading which means the pace of price increases should fall in August. If the core monthly increases remain high, this will be supportive of those who think inflation is more enduring. Similarly, watch if high price increases spread to more categories. This would point to inflation broadening and becoming more persistent.
Chart of the Day – DXY stuck in range
Recent Fed speak has not moved from the view that inflation is temporary. Disappointing jobs figures are the most important part of the FOMC’s mandate so even another rise in inflation may not move Fed rate expectations and the dollar that much.
Markets may have half an eye on the longer-term impact of the Fed meeting and other central bank activity next week. The dollar index (DXY) is stuck trading around the 50-day SMA above 92.50. The euro makes up over half of this index with JPY and GBP nearly 25%. With the daily RSI firmly sat at 50, dollar bulls will need to push beyond yesterday’s high at 92.88 to regain momentum. Friday’s low at 92.33 will be the target for sellers on the way to recent lows at 91.94.
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