Overnight Headlines

*USD was firmer on the back of hawkish Fed messages and infrastructure bill

*US stocks hit new records though the Nasdaq dipped 0.5%

*US Treasury yields touched their highest levels since mid-July

USD was mostly firmer against its major peers. The DXY edged higher near to the July top at 93.19. Dollar bulls are aiming for the March year-to-date peak at 93.43. EUR fell for its sixth straight day of losses and is closing in on the March low at 1.1704. USD/JPY rose to the highest level since 14 July and is also rising for a sixth consecutive day. AUD and NZD bucked the trend, recovering some of their recent losses.

US equities closed slightly higher with the Dow and S&P500 both hitting record highs. They were lifted by economy-linked value stocks after the Senate passed a bipartisan $1 trillion infrastructure package. Financials and industrials were the clear winners. Energy and materials also fared well with the bounce in commodity markets. Asian markets are higher, except for South Korea which recorded more than 2,000 new daily infections. Only 16% of South Koreans are fully vaccinated.

Market Thoughts – US CPI in focus

Today, the market gets the new release of the other part of the Fed’s mandate (US inflation data). Consensus is expecting the monthly figures to ease both for core and headline. The June print surprised to the upside and a similar result today would give a further boost to US yields and the dollar. This would stir more hawkish Fed expectations. Supply bottleneck shortages and reopening challenges may hinder economist’s read of this month’s data.

We got more Fed comments yesterday with known dove Evans saying the economy had made good progress. But he stopped short of using the word “substantial” and wanted to see a “few more” job reports, which would push any decision to November.

Chart of the Day – EUR/USD four-month lows

The world’s most traded currency pair is testing the lows for the year at 1.1704. The greenback is enjoying August as the market looks to a Fed able to stick to its taper expectations before year-end amid “substantial further progress”. The ECB meanwhile is offering no support to the single currency. Growth expectations have potentially already peaked. The clear bearish trajectory since late July is now nearing oversold territory on the daily RSI. So, a sustained drop below the November 2020 low near 1.16 is not high in the short term. That said, watch for stops giving way below the current support zone around 1.17.