Trading for the Rest of the Week - August 16, 2016

Inflation for July Rose by 0.8% (year-on-year) What Does This Mean?……

The CPI for urban consumers in the US is based on a standard ‘basket’ of items including services less energy services (57.3%), commodities less food & energy commodities (19.4%), energy (9.3%) and food (14%). The rate of increase in prices is an important economic indicator as to the health of the US economy. If inflation is growing at a less than optimal rate, this presents problems for the overall growth of the economy.

The growth in consumer prices during July 2016 was just 0.8% year-on-year. This marks a notable decrease over April, May and June which grew at 1.1%, 1% and 1% respectively. In an era where the Fed is targeting an inflation rate of 2%, declining rates of price increases are seen as bad for the economy. The current inflation rate is a 7-month low, and it is 0.1% lower than market expectations. The biggest drivers of the current low rate of inflation are energy, and food inflation.

Why the US Dollar Index is Affected

What ‘low inflation rate growth’ means is that investor sentiment and trader sentiment vis-a-vis US economic growth and the USD is curtailed somewhat. We are likely to see the US dollar index taking a hit on Tuesday 16 August 2016, and Wednesday, 17 August 2016. Currently, the US dollar index is at 94.81, down 0.83% or 0.79. Over the past 5 days, the index has dropped from 95.857 on 10 August to its current level of 94.657. For the year-to-date, the US dollar index is down 3.84%, and it sports a 52-week trading range of 91.919 on the low end and 100.510 on the high end. The DXY measures the greenback against a basket of 6 currencies and it is a broad indicator of the dollar’s performance.

FX Trading this Week

In much the same way, we can expect major currency pairs such as the GBP/USD to gain momentum after the weak inflation figures for July. At the time of writing, the GBP/USD pair was trading 0.71% higher at 1.2967, up 0.0087. The GBP/USD currency pair is down 11.98% for the year, but over the past 5 trading days, it is down 0.26%. Between 5 PM on August 15 and 5 PM on August 16, the GBP/USD pair appreciated from 1.2875 to its current level of 1.2973.

The USD/JPY currency pair has moved in the same direction and is down 1.1415%, or 1.1560 Japanese yen at 100.1110. The 52-week trading range for this currency pair is 92.52 on the low end and 124.50 on the high end. For the year-to-date, the USD/JPY currency pair has depreciated by 16.76%, and over the past 5 trading days, it has declined by a further 1.80%. Over the past 1 day, a decline from 101.2670 to its current level of 100.1220 is evident.

How Traders Are Capitalizing from the Data

Therefore, broadly speaking we can conclude that the release of economic data for the July inflation figures will add momentum to the already bearish trend we are seeing with the USD.