USD Firmer Following Better Consumer Sentiment Data on Friday

The US Dollar is seeing better demand as we start the new week. Following improved consumer sentiment data on Friday, the Dollar Index is picking up again on Monday, now sitting around 3.2% off the yearly highs.

With US inflation moderating to 8.5% last month, down from the prior month’s 9.1% record highs, the USD dropped last week on the view that US inflation might well have peaked. While this might translate into a slower pace of hikes going forward, it is more constructive for longer-term US growth, helping keep USD supported here ahead of further key data releases this week such as retail sales and the latest FOMC minutes, both due Wednesday.

Key Factors for Today

- USD higher following better consumer data – traders focusing on moderating inflation
- China rate cut helps offset negative July data
- Risk assets supported on moderating US inflation view & further China stimulus
- JPY and USD leading in FX, AUD AND NZD weakest
- Walmart to report earnings today

Coming Up

- CAD Canadian Manufacturing sales
- USD Empire State manufacturing index
- USD NAHB Housing market index

Risk Market Shrug Off China Data Miss, Focus on Moderating US Inflation

We’re seeing a broadly positive start to the week for risk assets. While US stocks are looking a little stickier amidst the current USD buying, elsewhere asset markets are seeing decent demand on Monday.

News of the latest MLF rate-cut in China has helped offset the weaker industrial and consumer data released overnight, boosting Asian stocks nicely. The Nikkei in particular is faring very well with the index now almost 12% up off the June lows, hitting its highest level since January. However, if concerns over the health of the Chinese economy take on further prominence, this may well start to weaken global risk sentiment as recession risks move back into focus.

UK and European asset prices are rallying also on the back of weaker US inflation data as traders anticipate a slower pace of hiking from the Fed over the remainder of the year. However, the inflationary environment looks trickier for Europe, given the impact of the Russia- Ukraine war as well as ongoing supply-chain issues linked to Brexit and COVID.

Walmart Q2 Earnings to Be Closely Watched

On the earnings front, the big US names to watch this week will be Walmart, Target and Home Depot. Given the size of the US retailer, Walmart is often used as a barometer for gauging overall US economic health and the company’s profit warning last month was taken as a bearish sign by markets, putting greater focus on Q2 results.

JPY Leads in FX, Contrary to Rally in Risk Sentiment

In FX, JPY is leading the pack on Monday. Despite a broadly positive start for risk assets, including further gains in the Nikkei, JPY remains well-supported. The rally in JPY looks generally at odds with the higher US Dollar backdrop and likely reflects a shift in positioning as traders begin pricing in a slower pace of US rate hikes going forward.

AUD and NZD have been the hardest hit on Monday with both currencies extending losses across the board. Weaker data out of China is certainly not encouraging for AUD and NZD given the high level of exports seen from both countries and traders will certainly be monitoring further data releases from the world’s second largest economy going forward.