USD regains composure, CPI and retail sales key next week: The Week Ahead

It has been a turbulent week for markets overall, even if the baulk of it arrived on Monday. The USD index has regained the week’s earlier losses after the Fed quelled fears of emergency rate cuts. But that could change if next week’s US retail sales or CPI figures surprises to the downside. We also have a potentially live RBNZ meeting, UK CPI and Australian employment figures to contend with.

USD index technical analysis:

The early-week selloff found support around a bullish trendline, 102 handle and 50% retracement level. At the time of writing, the USD index is on track for a weekly bullish pinbar with an RSI (2) in the oversold zone. It is also the highest weekly volume bar in eight, which suggest a ‘change in hands’ from bears back to bulls given prices are flat.

Put together, I do not think the US dollar index is ready to break beneath 102 just yet. And that which brings upside potential next week, although moves could be limited until Wednesday ahead of US CPI.  

The daily chart is showing minor signs of exhaustion with Thursday’s bearish hammer, which failed to close above 103. A reasonably quiet calendar could make for an uneventful finish to the week. But given the strong reversal candle on the weekly chart, dips are favoured down to 102.50 for longs up to 104, near a high-volume mode (HVN).

The Week Ahead: Calendar

The Week Ahead: Key themes and events

• US inflation, retail sales, consumer confidence
• European sentiment (ZEW)
• UK CPI
• RBNZ meeting
• Australian wage inflation, employment

US inflation, retail sales, consumer confidence

Fresh on the back of concerns over emergency Fed cuts, I suspect traders will remain vigilant with incoming US data. Sure, the Fed may have soothed such concerns over cuts, but any further signs of economic weakness will likely be pounced upon by the doomsayers. And that means US CPI, retail sales and consumer sentiment will attract a lot of attention. Particularly is consumer spending and sentiment disappoints.

In all likelihood, inflation data will come in softer to suppress yields and the US dollar. But if retail sales and sentiment hold up, it keeps traders guessing over how aggressive cuts over the next year will really be.

Trader’s watchlist: EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones

Australian wage inflation, employment

The RBA are upping their hawkish commentary, which has poured cold water on those calling for a November cut. But that still hasn’t prevented cash rate futures implying a 50% chance of a cut at their next meeting, and a cut fully priced in by January (which seems extremely unlikely in my view). The 1-month OIS seems more reasonable with a 12% probability of a cut, but the key point is the entire OIS curve is beneath the cash rate as traders simply do not believe the RBA will hike.  

Still, if next week’s wages and employment figures come in hot, it laves the RBA less wriggle room to even entertain the idea of a cut and continue to throw hawkish commentary, believed or not.

Trader’s watchlist: AUD/USD, NZD/USD, AUD/NZD, NZD/JPY, AUD/JPY, ASX 200

RBNZ meeting, press conference

To think that the RBNZ surprised markets with a discussion on hikes two meetings ago, yet we now head into next week’s decision with a 25bp cut favoured. Swap markets imply around a 75% chance of a cut following the latest inflation survey, which has seen the 1 and 2-year CPI expectations fall well within the central bank’s 1-3% inflation target at 2.4% and 1% respectively. CPI has also softened to 3.3% y/y.

A cut would also bode well for Australian’s seeking to avoid another rate hike, as a dovish RBNZ takes the pressure off of the RBA to hike.

As always, the question then becomes whether they will signal further cuts next week.

Trader’s watchlist: NZD/USD, NZD/JPY, NZD/CHF, AUD/USD, AUD/NZD, ASX 200 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge