Dollar rise may continue this week. What are the key resistance levels?
The Dollar index resumed rally on Monday amid signs of renewed distress in equity markets. Demand for Dollars could also start to pick up as investors price in potential bullish surprises in the June US CPI release on Tuesday as well as Powell speech on Tuesday and Wednesday.
In the second half of the last week, greenback rally took a short break as June Fed meeting Minutes failed to provide an evidence of a hawkish shift in the Fed’s stance. Recall that after the FOMC meeting in June, there was a growing perception that the Fed may start to taper QE soon and wants to send markets a signal about that. The release of the Minutes lowered chances of this outcome as emphasis in the report was that the goals to reduce unemployment have not been achieved and therefore it is too early to adjust stimulus settings. At the same time, it was noted that the topic of QE tapering did come up in the debates.
The dollar was selling moderately last Thursday and Friday, with the price bouncing off the upper border of the mid-term trendline:
The 100-day SMA is entering a rally for the first time in a long time, and the 200-day SMA also appears to be making a low. The price is close to the moving averages, from this point of view, it will be easy to develop the upward momentum. Breakdown and consolidation above the 92.75 level may become a signal for medium-term purchases.
A strong US CPI report may act as a catalyst for an upturn, but it’s tough to expect inflation to be much higher than forecast. Starting in June, the influence of the low base effect (purely technical factor of increased inflation readings) has been reducing, in addition, the CPI and PPI of China for June, which contribute to the growth of inflation in the rest of the world, have also disappointed:
In China, the PBOC suddenly lowered the banking reserve ratio. This measure means that the central bank eases monetary policy and is designed to free up liquidity for lending or accumulating more assets on banks’ balance sheets. The PBOC often takes this measure when authorities anticipate a weakening of economic activity or an increase in bad debts. In this case, the amount of funds that banks can direct to long-term assets will be about 1 trillion yuan which is considerable as the total private debt is about 18.5 trillion yuan. The PBOC’s decision to ease monetary policy may also reflect concerns about inflation dynamics in June.
The second potentially negative signal from the PBOC can occur on July 15 when it will decide on the medium-term financing rate. If PBOC decides to cut the rate, coupled with the decrease in RRR, this can be perceived as an attempt to stimulate lending activity, at a time when the economy is seemingly on the solid footing. This could be a risk-off signal for financial markets.
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