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• Recent range highs broken after CPI release
• Lower inflation could increase gold’s appeal
• One more rate hike expected from the Fed

The US inflation data gave gold just the boost it needed to break back above $1,940 after failing to pierce that level in recent days.

The yellow metal has been range-bound in recent weeks between $1,900 and $1,940 and today’s report did what the jobs data failed to do; it provided the catalyst for a breakout.

Gold Daily

Source – OANDA on Trading View

There remains plenty of resistance ahead for gold and today’s move doesn’t necessarily suggest the correction we’ve seen since May is over but it’s a massive step in the right direction. If the inflation data continues to improve then that could be bullish for gold.

The next tests for gold are $1,940, $1,960, and $2,000, which roughly represent the 38.2%, 50%, and 61.8% Fibonacci retracement levels from the May high to the June lows.

The inflation data may have come too late to change the outcome of the July Fed meeting, especially in light of the June jobs report, but it may alter the central bank’s language if it does hike by another 25 basis points. It’s going to be a big summer of data.

• EURCAD broke resistance level 1.4500
• Likely to rise to resistance level 1.4750

EURCAD continues to rise after the earlier breakout of the resistance level 1.4500, which stopped the two of the previous impulse waves (1) and 1, as can be seen below.

The breakout of the resistance level 1.4500 accelerated the active upward impulse waves 3 and (3).

Given the strong bullish euro sentiment, EURCAD can be expected to rise further toward the next resistance level 1.4750 (top of wave 4 from May).

• GBPUSD broke key resistance level 1.2850
• Likely to rise to resistance level 1.3190

Sterling under the strong bullish pressure after the price broke the key resistance level 1.2850, which stopped the previous impulse wave (a) in the middle of June.

The breakout of the resistance level 1.2850 continues the active sharp upward impulse wave C of the weekly ABC correction (2) from last year.

Given the prevailing daily uptrend and strong USD sales across the FX markets, Sterling can be expected to rise further toward the next resistance level 1.3190 (target for the completion of wave C, intersecting with the daily up channel from March).

The Bank of Canada raised the overnight rate by 25 basis points, to 5%, while stating that it will continue with Quantitative Tightening (QT). With the hike, the policy rate is now at its highest level since 2001.

On economic growth the Bank stated that "Canada's economy has been stronger than expected" and that recent data signals more persistent excess demand in the economy. The Bank also flagged the recent pick up in the housing market and that conditions in the job market remain tight, with wage growth hovering around 4-5%.

On inflation, it stated that while "CPI inflation has come down largely as expected so far this year, the downward momentum has come more from lower energy prices, and less from easing underlying inflation." In addition, it noted that "underlying price pressures appear more persistent than anticipated" and that "businesses are still increasing their prices more frequently than normal". Finally, policymakers re-iterated. their concern that progress towards the 2% inflation target could stall.On the future path of policy, the Bank will "be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target." This is unchanged from the April statement.

Accompanying the Bank's policy statement was a fresh set of forecasts. Real GDP is now seen as expanding by 1.8% this year (versus 1.4% in April), 1.2% in 2024 (1.3%) and 2.4% in 2025 (nearly unchanged). In the near-term, growth is expected to be 1.5% in both the second and third quarters of this year.

Notably, the Bank's inflation projections have been materially upgraded. By 2023Q4, inflation is seen at 2.9%, versus 2.5% in their April projection. They've also pushed out when they see inflation hitting the 2% target, with that now anticipated to happen in the middle of 2025, as opposed to the end of 2024 in their April forecast.

Key Implications

Today's rate hike demonstrates that the Bank of Canada is not satisfied with the modest cooling in inflation and wage pressures that has been seen since its June hike. As it outlined in the statement, it's concerned about excess demand and core inflation that are proving to be more persistent than what policymakers had expected.

So, where does policy go from here?  The onus is on the incoming data, which we think will show enough weakness over the coming months for policymakers to remain on hold for the next few quarters. We're already seeing signs that job markets are softening, with vacancies well below prior peaks, the unemployment rate on the rise, wage growth beginning to moderate.

However, this view is not without risks. A big factor behind the persistence in excess demand and inflation noted by the Bank of Canada has been robust consumption. The Bank is counting on household spending slowing down in coming quarters but are cognizant of the risks. Our own forecast sees consumption slowing down materially in coming quarters, with this softness more apparent in 2024. Should household spending prove more resilient than policymakers anticipate, this would offer a pathway to higher rates.

Housing is also clearly weighing on the Bank's mind, given the recent pickup in activity and recent signs of resilience to its hike in June. The performance of this sector will also play an important role in any decision on rates moving forward.

The US consumer price index slowed to an annual rate of 3.0% in June from 4.0% the previous month. This was slightly below the expected 3.1%. Core inflation slowed to 4.8% from 5.3%, and 5.0% expected. This is the ninth consecutive report where an indicator has been in line or weaker than expected, but we see a different market reaction.

This time the markets are confident, risk appetite is rising, and the dollar is falling as the latest report has fuelled speculation that the Fed will not need to stick to its plan of two rate hikes this year or will allow for a quicker reversal to policy easing next year.

Traders’ and investors’ attention should now turn to the Federal Reserve’s assessment of the latest data. In addition to the speeches by Barkin, Kashkari and Bostic, the Fed’s Beige Book will be released today, which will be used as the basis for the Fed’s observations at the July meeting.

While the Fed is often wrong in its forecasts, it is still the Fed that has the final say on interest rate decisions. Despite the constant inflation surprises, FOMC members remain hawkish in their comments, regularly pointing out that the fight against inflation is not over.

After the latest inflation report, the dollar index was close to its lowest level since April 2022, losing more than 12% from its peak last September. This decline creates additional pro-inflationary pressure, unlikely to please the central bank.

Summary

Today's report on the Consumer Price Index for June brought good news. Headline consumer price inflation increased 0.2% over the month and 3.0% over the past year. For the latter, this was the lowest reading since March 2021. Excluding food and energy prices, the core CPI increased 0.2% (rounded up from 0.16%) over the month, the smallest monthly increase in core inflation since February 2021. A big decline in prices for travel services such as airfares and lodging-away-from-home contributed to the deceleration in core prices, as did the ongoing slowdown in primary shelter inflation. Used vehicle prices declined 0.5%, new vehicle prices rounded flat, and goods prices excluding vehicles fell 0.1%.

In the near term, we expect the more moderate pace of price growth signaled by the June CPI to continue. While the sharp drop in travel prices will be hard to repeat, the decline in vehicle prices has more room to run, and the ongoing disinflation in primary shelter should continue into the second half of this year. More broadly, the expanding supply side of the economy and slowing demand growth are helping to slow inflation from the blistering rates seen in 2021 and 2022. That said, core CPI inflation is still up 4.8% over the past year and 4.1% annualized over the past three months. The FOMC will need to see several more inflation prints like today's before it declares its mission accomplished.

We expect core inflation in the second half of the year to run about 3% on an annualized basis. This expected improvement relative to the 4.6% pace of core inflation in the first half of this year will likely be enough to where the FOMC believes it can sit and wait for the effects of prior tightening to work through the economy after one additional 25 bps hike at its next meeting on July 26. However, with the underlying trend in inflation likely to be stuck closer to 3% than 2%, rate cuts remain a long way off, in our view.

CPI Inflation Drops to Lowest Reading since March 2021

The Consumer Price Index (CPI) rose 0.2% in June, a tenth slower than the consensus expectation among forecasters. Consumer price inflation over the past year fell to 3.0%, the lowest reading since March 2021 and well below the peak of 9.1% in June 2022. Some of the inflation slowdown over the past year has been driven by base effects, particularly for energy prices. One year ago, prices for oil and natural gas were much higher due in large part to a surge in prices that followed Russia's invasion of Ukraine. But even setting this aside, there are clear signs that inflation continues to slow steadily.

Compared to one month ago, energy prices increased 0.6%, led by gasoline (+1.0%) and electricity (+0.9%). Prices for natural gas utilities continued to come back down to Earth, falling 1.7% in June and 19% over the past year. Food prices increased a modest 0.1% in June compared to May. Grocery store inflation, which rose more sharply last year compared to prices for food consumed away from home, has also dropped off more quickly on the way down. Food at home prices are up "only" 4.7% over the past year. While still high, this is the slowest pace of food inflation in nearly two years.

Excluding food and energy, price growth also came in a touch softer than expected. The core CPI rose 0.2% in June, the smallest monthly increase since February 2021. The more benign print was helped along by goods prices resuming their retreat, dropping 0.1%. After back-to-back gains of over 4%, used vehicle prices fell 0.5%, with further declines expected to be on June's heels as auction prices have tumbled. New vehicle prices edged down ever so slightly (-0.03%), while recreational and household goods also declined in a sign pandemic spending patterns are slowly reverting and supply snarls continue to abate.

Core services inflation also pointed to activity normalizing after a wild few years. Prices for travel-related services tumbled 3.8% with notable declines in both airfare (-8.1%) and hotel prices (-2.0%). Gains in primary rent and owners' equivalent rent also decelerated amid a cooler housing market this past year. Yet, prices for remaining "other" services, which include medical care, insurance, recreation and personal care among other things, continue to advance at a solid rate, up 0.3% in June and 3.8% annualized over the past three months.

One More Hike in July, Then Done

Today's softer-than-expected print with signs of pandemic-era distortions fading provides additional evidence that disinflation is occurring in real-time. Looking ahead, we expect the more moderate pace of price growth signaled by the June CPI to continue. The decline in vehicle prices has more room to run, and the ongoing disinflation in primary shelter should continue in the second half of this year. Goods inflation beyond vehicles also has scope to slow, with supply chain pressures unwinding and the cost of input goods down over the past year. More generally, the increasing financial squeeze on consumers as pandemic savings run dry and borrowing costs rise is making consumers more discerning and less willing price-takers when compared to the past two years.

However, a timely and sustained return to the FOMC's 2% inflation target remains far from assured. Wages may no longer be accelerating, but the tight jobs market is keeping labor costs growing in excess of the range that is consistent with 2% inflation over time. Prices for food and energy commodities have been largely stable since the start of the year, and the deflationary impulse from these categories should fade in the months ahead. While headline inflation has tumbled from its 42-year high a year ago, we expect the next leg of disinflation to be slower going. Even within the core CPI where the disinflation forces in housing and vehicles will be more pronounced, we expect core inflation in the second half of the year to run a bit north of 3% on an annualized basis. The improvement relative to the 4.6% pace of core inflation in the first half of this year will likely be enough to where the FOMC believes it can sit and wait for the effects of prior tightening to work through the economy after one additional 25 bps hike at its next meeting on July 26. However, with the underlying trend in inflation likely to be stuck closer to 3% than 2%, rate cuts remain a long way off in our view.

Financial markets are buzzing at the US open on Wednesday, with investors buoyed by a very promising inflation report from the US.

The report not only beat at the headline level but core actually slipped even further, dropping to 4.8% for the first time since October 2021. The monthly data was also extremely encouraging, with headline and core falling to 0.2% which was lower than the consensus forecast in both cases. It really is just what the doctor ordered.

Of course, there's been plenty of setbacks over the last couple of years so we don't want to get too carried away with one inflation report but it really is about as good as we could have realistically hoped for.

That said, it's unlikely to change the outcome of the debate that takes place in two weeks. The Fed is still extremely likely to hike by 25 basis points, rightly or wrongly, as the labor market data on Friday simply wasn't good enough. In fact, the wages component was quite the opposite and will likely convince the FOMC that one more hike is warranted, which is what markets are still heavily pricing in.

But that may well now be the last and if we can see any further signs of progress over the summer then that will likely end the debate altogether, shifting the conversation from how many more hikes to the timing of the first cut.

Brent Crude trying to break $80 after US inflation report

Oil prices have been understandably lifted by the release which makes sense. Anything that could enable a soft landing in the US is good for oil prices. Brent was already trending higher though and is now at its highest point since April, having already broken out of the range it traded within for the last couple of months. ​

The next level for Brent to overcome is $80, which would be a big psychological leap. That may also see WTI break above its June high following the spike on the 5th. The move higher also suggests the latest efforts of Saudi Arabia and Russia are working in tightening the markets and boosting prices after multiple failed efforts.

Gold gets a welcome boost but can it be sustained?

The US inflation data gave gold just the boost it needed to break back above $1,940 after failing to pierce that level in recent days. The yellow metal has been range-bound in recent weeks between $1,900 and $1,940 and today's report did what the jobs data failed to do; it provided the catalyst for a breakout.

There remains plenty of resistance ahead for gold and today's move doesn't necessarily suggest the correction we've seen since May is over but it's a massive step in the right direction. If the inflation data continues to improve then that could be bullish for gold. The next tests for gold are $1,940, $1,960 and $2,000, which roughly represent the 38.2%, 50% and 61.8% Fibonacci retracement levels from the May high to the June lows.

Is lower inflation good for crypto?

There's been a lot of volatility in bitcoin in the aftermath of the US inflation release but in terms of sustained direction, not much appears to have changed. At the time of writing, it's basically trading back where it started, although the price remains extremely choppy so that may not be the case an hour from now, let alone by the end of the day. Traders, as it stands, seemingly can't make up their mind if it's good or bad for crypto.

Markets

Today was one stretched countdown to the US inflation numbers without a lot of market fireworks in the run-up to it. Prices at the other side of the Atlantic generally came in slightly below expectations. Both headline and core inflation rose 0.2% m/m, missing a 0.3% analyst estimate. Yearly price pressures eased from 4% to 3% in the headline gauge and from 5.3% to 4.8% in the core. The bar was set at 3.1% and 5% respectively. It’s the slowest pace in about two years. Base effects had their maximum downward impact as CPI in June last year hit its four-decade high on a 1.2% m/m surge. Core inflation back then also shot up an unusual 0.6% m/m but only hit its peak in September 2022, also on a 0.6% m/m pace. This means we still might see some strong statistical downward pressure in the core number later this year. Specifically this month, though, used cars (-0.5% m/m) and airline fares (-8.1%) weighed the figure down. Shelter prices rose a solid 0.4%, explaining about 70% of the monthly June increase. Energy prices picked up again (0.6%) after declining in May, led by gasoline and electricity. Goods inflation fell 0.1% m/m but service inflation still rose 0.3%. For Richmond Fed president Barkin today’s inflation is still too high. He warned for backing off too soon and added that he is comfortable to do more if inflation doesn’t get to the 2% goal. Barkin, however, does not vote on monetary policy this year.

US rates and the dollar since the payrolls last Friday corrected lower, even as economic data earlier last week surprised to the upside. It tells you something about the market’s mindset going into today’s CPI release. The reaction as such was textbook. Core bonds jumped with US Treasuries outperforming vs Bunds. Yields at the 2-5 year bucket drop 10.7-11.6 bps. The 2 year yield eases further south of the symbolic 5% barrier. Longer maturities including 10 and 30 year slip 5.9 and 0.3 bps respectively with the former testing support at the 3.90-3.92% zone. German yields follow US peers by shedding 1-5.9 bps with the front end outperforming. First important support zones are not (yet?) being tested though (3.17% for the 2 y yield, 2.57% for the 10 y yield). Equities cheered at the data, presuming it relieves the Fed somewhat. The EuroStoxx50 extends gains to 1.4%, Wall Street opens with gains between 0.7-1.2%. Oil turns positive for the day with a barrel of Brent touching $80 for the first time since May. The dollar slid. EUR/USD jumped to the highest level since early May. At 1.1084 the pair is ever closer towards the YtD high of 1.1095. It even came to a test. DXY (100.95) in a mirror move dropped towards the YtD lows of 100.78. The yen takes advantage and pushes through to USD/JPY 139.24.

News & Views

The Bank of England published its bi-annual Financial Stability Review. The UK economy has so far been resilient to interest rate risk, though it will take time for the full impact of higher interest rates to come through. More households are being affected by higher interest rates as fixed-rate mortgage deals expire. The proportion of households with high debt service ratios, after accounting for the higher cost of living, has increased and is expected to continue to do so through 2023. The corporate sector is expected to remain broadly resilient to higher interest rates and weak growth. The UK banking system is well capitalized and maintains large liquidity buffers. Asset quality overall remains relatively strong, with higher interest rates having had a limited impact on credit risk so far.

Reserve Bank of Australia governor Lowe this morning announced that the rate-setting board will move to 8 meetings a year from 11 now beginning in 2024. The former is the pace followed by most major central banks: “The less frequent and longer meetings will provide more time for the board to examine issues in detail and to have deeper discussions on monetary policy strategy, alternative policy options and risks, as well as on communication.” The RBA meets next on August 1 and conduct a full review of its central forecasts and risks. Lowe, who’s term ends mid-September but could still be reappointed, said that consumption growth is weak largely because of what is going on with monetary policy. The RBA is confident that they’re doing is working. The question is how much more they need to do and the RBA has a completely open mind on that. Australian money markets discount a policy rate peak around 4.5% from 4.1% currently. The Aussie dollar gains today against an overall weak US dollar with AUD/USD (0.6735), taking out short term resistance around 0.67.

Daily Pivots: (S1) 1.3209; (P) 1.3253; (R1) 1.3274; More....

USD/CAD's strong break of 1.3202 support confirms completion of rebound from 1.3115 at 1.3385. Rejection by 55 D EMA also maintains near term bearishness. Intraday bias is back on the downside for retesting 1.3115 first. Break there will resume larger down trend to 61.8% projection of 1.3653 to 1.3115 from 1.3386 at 1.3054, and then 100% projection at 1.2848. For now, outlook will remain bearish as long as 1.3386 resistance holds, in case of recovery.

In the bigger picture, price actions from 1.3976 are viewed as a correction to up trend from 1.2005 (2021 low) only. Hence, the up trend is in favor to resume through 1.3976 at a later stage. Nevertheless, another fall below 1.3115 will extending the decline from 1.3976 to 61.8% retracement of 1.2005 to 1.3976 at 1.2758, and raise the chance of bearish trend reversal.