Traders should expect increased volatility after the release of important inflation reports.
It will be a volatile day in currency markets as traders prepare for the release of the inflation reports from the U.S. However, the action is not limited to U.S. numbers, and traders have already had a chance to see inflation data from China.
China’s Inflation Rate grew by 0.5% month-over-month in July, in line with the analyst consensus. On a year-over-year basis, Inflation Rate was 2.7%, compared to the analyst consensus of 2.9%. Producer Prices increased by 4.2%.
USD/CNY was mostly unchanged after the release of the report. At this point, geopolitical issues and Covid news have more impact on the Chinese currency. Inflation data from China is interesting for all currency traders as it shows that inflation may start to cool down due to reduced economic activity.
In Germany, traders will have a chance to take a look at the final reading of the inflation data for July. Inflation Rate is expected to increase by 0.9% month-over-month. On a year-over-year basis, Inflation Rate is projected to grow by 7.5%.
Typically, the final readings of inflation reports in the Euro Area meet analyst consensus, so the report may not have a material impact on EUR/USD dynamics. However, traders should note that the energy crisis in Europe develops at a robust pace, and it may put additional upward pressure on prices.
The main event of the day is the release of inflation data from the U.S. Inflation Rate is expected to decline from 9.1% in June to 8.7% in July due to lower energy prices. Core Inflation Rate is expected to increase from 5.9% to 6.1%.
The report will have a major impact on currency markets. The FedWatch Tool indicates that there is a 69.5% probability of a 75 bps rate hike at the next meeting.
As we have seen in recent trading sessions, expectations of an aggressive rate hike failed to provide enough support to the American currency. However, any surprise in inflation numbers may quickly change the situation.
If prices are rising faster than expected, a major 100 bps rate hike may be on the table. At the same time, lower-than-expected inflation will likely put material pressure on the U.S. dollar. In this case, EUR/USD and GBP/USD, which have been recently consolidating, may rally to new highs.
For a look at all of today’s economic events, check out our economic calendar.
Vladimir is an independent trader and analyst with over 10 years of experience in the financial markets. He is a specialist in stocks, futures, Forex, indices, and commodities areas using long-term positional trading and swing trading.