The US Dollar may find a lifeline in July’s US CPI report after tumbling overnight in the wake of dovish comments from the Fed’s James Bullard.

Talking Points

US Dollar to Rise if July’s CPI Data Boosts Bets Fed “Taper” in September
Kiwi Soars as PMI Jumps to Nine-Year High, Driving RBNZ Rate Hike Bets
UK Retail Sales Unlikely to Yield Strong Response from the British Pound

The spotlight is on US CPI data in the day ahead. The headline year-on-year inflation rate is expected to rise to 2 percent in July, a five-month high. Investors are likely interpreting US economic news-flow in terms of its implications for the likelihood of a Fed decision to “taper” QE asset purchases at the September policy meeting. With that in mind, a relatively strong print will probably be seen as bolstering the case for a cut-back in stimulus and prove to be broadly supportive for the US Dollar. A soft outcome can be expected to produce the opposite effect. On balance, US economic data has increasingly outperformed relative to consensus forecasts over the past 2 months, suggesting the path of least resistance favors an upside scenario.

The greenback slumped in overnight trade, down as much as 0.4 percent against its leading counterparts, in a move that may have reflected a response to dovish commentary from the Federal Reserve’s James Bullard. The President of the central bank’s St. Louis branch said policymakers need to see more data before deciding to scale down QE, calling for “caution” with too-optimistic economic forecasts. Bullard’s comments are particularly noteworthy considering he is a member of the rate-setting FOMC committee this year. The New Zealand Dollar outperformed, rising as much as 0.7 percent against its US namesake, on the back of supportive economic data underpinned building RBNZ interest rate hike expectations. The Manufacturing PMI gauge rose to a nine-year high. Traders are now pricing in 84bps in RBNZ tightening over the next 12 months according to data from Credit Suisse.

July’s UK Retail Sales report is the only bit of noteworthy event risk on the calendar due in European hours. Expectations call for a 2.7 percent increase, marking the largest year-on-year increase in four months. The improvement has been well-telegraphed by the analogous release from the British Retail Consortium (BRC) last week however. That means a print in line with expectations is unlikely to elicit a lasting response from the British Pound. That tilts volatility risk to the downside, with the UK unit vulnerable to selling pressure in the event of an unexpected disappointment.

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