Inflation fears on the rise

Over the past few weeks, we saw a lot of evidence that the US economy is slowing down, and inflation is on the right track. However, over the past few days, some of the data increased the fears that inflation might need more actions and time.

ISM Services PMI at the highest since February

After the better-than-expected ISM Manufacturing PMI on Friday, the Services PMI showed another positive outcome, rising to as high as 54.5, which is the highest reading since February, while it had been anticipated to decline to 52.5 down from 52.7.

The data showed an expansion across all components, including Prices Paid, Employment, and New Orders.

Fears of inflation

The Services PMI Prices Paid jumped for the second month in a row, rising to 58.9 in August, up from 56.8. This is the highest reading since last April. This outcome increased fears over inflation for one major reason.

There is a high correlation between the ISM Services Prices Paid and CPI. Currently, this MoM correlation stands at 0.3, leading market participants to suspect a higher CPI print this month.

Fed Fund Futures moving further

The Fed Fund Futures still predict no rate hike in September which is not a surprise. However, November’s probability ticked higher again to 48% side by side with December. So far, as long as the probability is below the 50% mark, there seems to be no reason to believe that markets might be pricing in two more rate hikes ahead. The upcoming inflation data remains the key.

Bank of Japan verbal intervention begins

The Japanese Yen dropped again over the past few days. USDJPY reached another level not seen since November of last year, shy of the 148.0 level.

It looks like the Bank of Japan decided to try to intervene verbally as another option before taking any action.

Yesterday, Japan’s Vice Minister of Finance Kanda said: “Won’t rule out any options if FX moves continue”. He also mentioned that they are watching FX with a high sense of urgency. Such remarks did put some pressure on USDJPY, but it seems far from being effective.

We maintain our bearish outlook as we believe that the actual intervention is a matter of time. It might be this week or next week, no one knows, but an action is a matter of time.

One thing traders might keep an eye on over the next few days is Japan’s 10-year yield, as an actual intervention might occur if the 10-year yield breaks above the prior high of around 0.67 or if it reaches 0.7%.

DXY near 105.0

The US Dollar Index continued to rally following yesterday’s data, as fears of higher inflation returned. Despite the fact that there is a lot of evidence that the economy is slowing down, the fear of inflation is behind the current rally.

In the meantime, the index is trading near the 105.0 resistance area, while the technical indicators are still heavily overbought, which keeps our bearish outlook unchanged. At the same time and despite trading above the 104.0 resistance area, the risk of buying the US dollar at the current levels is much higher than shorting it. Therefore, managing risk is key going forward until the upcoming inflation data confirms or denies whether inflation is still on the right track or the Fed needs to do more.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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