FX Daily Strategy: N America, Jul 29

The FOMC meets on July 29 in a meeting that will see no update to the dots or economic forecasts. With forward guidance now becoming limited all meetings should be seen as live, but after softer than expected June non-farm payroll and more importantly CPI data, a change in policy looks unlikely at this meeting.  The case for tightening will be debated, but no more than two hawkish dissents are likely. 

The last meeting on June 17, the first under incoming Chair Kevin Warsh, saw rates left unchanged at 3.5-3.75% with no dissenting votes, but the dots had a hawkish skew, with nine out of eighteen respondents seeing tightening this year, and only one seeing an ease and eight seeing steady policy. Minutes from the meeting showed two scenarios were discussed. The first saw inflationary pressures dissipating and inflation soon beginning to return to 2%, in which it would be appropriate to maintain or eventually lower the target range for rates. The second saw stable labor market conditions and persistent elevated inflation, under which some policy firming would be needed.

Cautious trade around resistance at 101.50 has given way to a pullback, with prices currently trading around 101.25. Intraday studies are falling, pointing to room for continuation towards support at 101.00. However, mixed/positive daily and weekly readings should limit any initial tests in consolidation. A break, if seen, would add weight to sentiment and extend losses towards strong support at the 100.35 weekly low of 15 July. Meanwhile, resistance remains at 101.50 and extends to critical resistance at the 101.80 current year high of 24 June. This range should cap any immediate tests higher.

The Q2 and June Australian CPI confirmed another moderated (and slightly below market) if still above target number.  June monthly came in at 3.8% y/y, Q2 at 4%. The all important trimmed mean CPI arrived at 3.6%. It seems to suggest the inflationary pressure from energy was indeed fading, before the revival in July.

AUD/USD is nudging below support at the .6950 congestion, returning focus to the downside for retest of support at .6912/00 congestion area and .6865 June low, though that very muih dollar dependent out of the Fed of course.