The USD was the strongest of the major currencies at the start of the NY session but started to move lower in the NY session helped by lower yields. Although the AUD is the weakest of the major currencies today, the USD is only closing higher vs the AUD, and CAD. The greenback is near unchanges vs the NZD. It is the weakest vs the JPY (which is the strongest of the major currencies today.
The strongest to the weakest of the major currencies
The biggest fundamental catalyst today was the Manheim June used-vehicle price index which saw a significant decrease, falling 4.2% month-on-month and 10.3% year-on-year, marking some of the largest declines in the index’s history, and the most substantial since the start of the pandemic in April 2020. The year-on-year drop is also substantial, down another 2.7% from May’s 7.6% annual decline. However, these increasing year-on-year moves are expected to decrease in the coming months as the market normalizes. While used retail inventory has been improving, less volatility in wholesale price movements is anticipated for the rest of the year. The release’s importance is magnified by the CPI data which will be released on Wednesday. In addition, forecasts are centered on a drop in Core CPI over the summer hinged on falling used auto prices. This report suggests this is likely.
There were 4 separate Fed members who weighed in on the economy/policy.
Cleveland Federal Reserve President Loretta Mester commented that the Fed will need to tighten further to reduce stubbornly high inflation. She suggested that an additional rate hike would decrease the risk of more drastic action in the future and observed that rate increases so far have been moderating economic activity. Mester noted that the economy has proven stronger than expected and supply chain disruptions have eased. However, core inflation and wage pressures remain too high to return inflation to the 2% target. Mester nevertheless stated that no decision has been made yet regarding a rate hike in July, as more data is needed. CPI inflation will be key on Wednesday. The expectations are the headline YoY will decline toward 3%. She mentioned that housing inflation is expected to lessen but still presents an upward risk for price pressures. Mester also highlighted that the economy might be better off if the federal funds rate goes higher and that there aren’t signs of excessive credit tightening.
Fed’s Bostic also spoke today. He has been more dovish of late. Bostic remarked that the U.S. is still largely operating within a pandemic economy, with a considerable amount of economic strength resulting from pandemic support measures. He expressed concern about the unsustainable high levels of inflation, attributing them primarily to the response to the pandemic, rather than excessive risk-taking. Despite this, he noted that the inflation trajectory is heading in the right direction, with the Fed committed to ensuring this continues. While Bostic acknowledged the economy’s slowdown, including decreasing job growth and inflation rates, he stressed that the Fed can afford to be patient, allowing restrictive policies to play out. He voiced concerns about stalling inflation or rising expectations, although he believes that expectations are currently well anchored. Bostic further asserted there’s no expectation of needing to increase rates any further, acknowledging that the path forward is unclear and inflation reduction might take longer than anticipated. He noted the positive underlying data on inflation, expecting inflation could return to the 2% target without further rate increases. He also mentioned signs of wage growth normalizing and service spending peaking.
Federal Reserve Vice Chair Barr after commenting on banking regulation, did weigh in on the economy and policy. He said inflation is currently far too high. He stressed that the Federal Reserve is keenly focused on bringing inflation down to the targeted level and mentioned that significant progress has been made in this area. The recent actions taken on interest rates are a part of the careful and methodical strategy implemented to manage this issue. Despite the progress made so far, Barr affirmed that there is still a bit more work needed to fully address the high inflation.
Finally, SF Fed President Mary Daly also spoke. She said that the U.S. economic momentum continues to exceed expectations. She voiced the necessity for additional rate hikes (more than 1), stressing the importance of a data-dependent policy approach. The need for two more rate hikes this year is due to high inflation rates. However, her exact number of rate hikes may be adjusted based on future economic data. She acknowledged that the risk of underacting still outweighs overacting. However, she suggested a slower rate increase than last year to properly assess the economy’s response. She noted that shoppers, despite having ample employment opportunities, are grappling with the challenge of rapidly rising prices. Daly expressed the goal to prevent excessive rate increases from damaging the labor market.
Looking at some of the major currency pairs:
- EURUSD: EURUSD was in a narrow trading range of about 30 pips at the start of the NY session. As the USD started to get hit the pair reversed to the upside, broke to new highs, and also moved above a key swing area going back to June 16 at 1.09759. Buyers took the price higher and is closing the day near the natural resistance level at 1.1000. The high for June reached 1.10112 and is the next upside target to get to and through. Moving above and the February 2023 high at 1.10317, and the high for the year comes in at 1.1095.
- GBPUSD: The GBPUSD peaked on Friday near the high from June at 1.2848. The price moved lower in the Asian and European sessions but once the price approached the rising 100-hour MA at 1.1745, the dip buyers against the technical level entered, and a rotation to the upside was started (the low for the day reached 1.1748). The subsequent rally ended up taking out the high from Friday and June on its way to an intraday high at 1.28675. That not only took the pair to a new 2023 high but also to the highest level since April 2022. The next upside target in the new day comes in near a topside trend line on the hourly chart near 1.2878 (and moving higher). Risk is now at 1.2835. The price is trading at 1.2855.
- USDJPY: The USDJPY corrected higher in the Asian session today after falling sharply on Friday, The pair reversed lower and int he US session extended below the low from Friday at 142.055 and then the 50% of the move up from the May 31 low. That level comes in at 141.74. The low reached 141.27. Close risk for sellers is the 50% midpoint level at 141.74. ON the downside the 141.00 do to 140.959 (61.8%) is the next target.
In other markets:
- Crude oil fell $0.87 to $72.99 after toying with a move above the 100 day MA at $73.78
- Gold is ending little changed at $1924.58
- Bitcoin rose from around $30209. The current level is $30709.
US stocks closed higher:
- Dow rose 0.62%
- S&P rose 0.24%
- Nasdaq rose a modest 0.18%