The latest U.S. inflation data for July eased. The consumer price index (CPI) and the wholesale price index (PPI) were both lower than expected. Investors feel that local inflation may have reached its peak, hoping that the Federal Reserve will slow down the pace of interest rate hikes. The meeting in September may only need to raise interest rates by half a percentage point, which will stimulate the dollar index to fall below the 50-day line, as low as 104.66. However, several Fed officials have since issued tough remarks. It is believed that there is still a long way to bring inflation back to the target level of 2%, and interest rates must continue to be raised to stabilize prices, expressing the bureau's determination to stop inflation. Affected by the related remarks, the yield on the 10-year U.S. Treasury bond rose by 3%. In addition, to weaken several major non-U.S. currencies, the euro, pound and yen, the dollar index continued to rebound from lows, approaching the 20-year high of 109.29 on 14 July again.  

The Fed will know the outcome of the August inflation data before the September rate meeting. It is believed that it will affect the rate hike and future deployment. If inflation continues to fall, the bureau has reasons to slow down the pace of interest rate hikes, as the market is now worried about a recession. The recently released data shows that the economy is showing a sign of a downturn. In August, Markit's service and manufacturing PMIs both hit two-year lows. Housing and retail sales data were also unsatisfactory, and long- and short-term government bond yields continued to invert. Large banks have warned that the Fed should be more mindful of the recession than the threat of inflation.

However, the U.S. economy has concerns, the eurozone and the U.K. are even worse. The Russo-Ukrainian war worsened relations between Russia and Europe. The supply of natural gas to Europe has been extremely unstable over the past few months, often repairs pipelines as grounds for shutting down gas supply. The supply of gas has also been severely lacking. Recently, the price of natural gas in the region has risen sharply, which has caused a serious impact on the economies of European countries. In addition to the worst drought in 500 years in Europe this year, grain harvests have fallen sharply and wildfires have occurred frequently. The drop in water levels has also affected the transportation and supply chain, adding to the worsening of the economy. The UK faces serious inflation with the latest figures rising to double digits and large banks estimate that will reach 18%. The central bank has warned that there will be a recession by the end of this year, and people's livelihoods are affected by rising prices. Many industries have launched strikes and protests, asking the government to solve the problems of people's livelihoods.

The euro has fallen below parity and the pound has fallen to 1.17 which is close to the post-Brexit lows. The US interest rate hike may be variable, but the short-term exchange rate still has an advantage. It is suggested to maintain the strategy of short-term speculation which buying at a low level and focusing on 107.50 for initial support. The euro may test 0.9750/0.9800 and the initial resistance is 1.0100/50.

Patrick Law

General Manager of Hantec Group