Forex Today: Dollar slides further with focus on inflation data

During the Asian session, survey data from Australia is due, with the Westpac Consumer Confidence and the National Australian Bank's Business Confidence. Later in Europe, the highlight will be the UK employment report. Market participants will also position ahead of a busy Wednesday that includes central bank decisions from New Zealand and Canada, and the US CPI.

Here is what you need to know on Tuesday, July 11:

Wall Street finished in positive territory after a cautious opening following inflation data from China that pointed to softer demand. The Dow Jones gained 0.62%, and the Nasdaq climbed 0.18%. Crude oil prices dropped less than 1%, while Gold finished flat around $1,925/oz. Investors will start digesting the Q2 earnings season.

China reported lower-than-expected inflation data, with the Consumer Price Index (CPI) flat in June, against expectations of a 0.2% increase. The Producer Price Index (PPI) dropped to -5.4% YoY, below the -5% expected. Deflationary evidence keeps the door wide open to more stimulus, not only monetary but also including fiscal measures.

The US Dollar weakened during the American session, affected by data reflecting lower inflation expectations and on the back of a decline in US Treasury yields. The 10-year bond yield declined from 4.07% to 4.00%. Market participants await the key US Consumer Price Index number due on Wednesday that will be critical ahead of the July 25-26 FOMC meeting.

On Friday, Nonfarm Payrolls weighed on the US Dollar Index (DXY) which continued to slide on Monday. It dropped for the third consecutive day, falling below 102.00, posting the lowest daily close in a month.

The Japanese Yen outperformed, boosted by the recovery in bonds and ahead of US inflation data. USD/JPY continued to consolidate after being unable to break above 145.00 and dropped below 141.50, consolidating well below the 20-day Simple Moving Average (SMA) for the first time since April.

EUR/USD rose above 1.1000, and the momentum remains positive, supported by a weaker US Dollar. On Tuesday, the German ZEW Survey will be released, and also the final reading of the June German CPI that should show no surprises from the preliminary reading.

GBP/USD rose to the highest levels since April 2022, above 1.2850. Bank of England (BoE) Governor Andrew Bailey said that they had to “see the job through” regarding inflation. The UK employment report is due on Tuesday. EUR/GBP spiked to near 0.8600 and then pulled back to 0.8550.

USD/CAD briefly traded above 1.3300 and then pulled back to end flat around 1.3280. On Wednesday, the Bank of Canada (BoC) will announce its interest rate decision, with expectations of a rate hike after Friday's labor market data surpassed expectations.

Analysts at the National Bank of Canada:

The Bank of Canada put the public on notice last month when they ended their brief two meeting pause to restart the tightening cycle. In the absence of a meaningful deterioration of economic data over the last five weeks, we’re looking for the Bank to again increase their overnight target by 25 bps to 5% on Wednesday. 

AUD/USD finished flat and remained sideways, unable to break above 0.6700 and supported by the 0.6600 area. Consumer Confidence data from Australia is due on Tuesday. Reserve Bank of Australia Governor Philip Lowe will deliver a speech on Wednesday.

NZD/USD rose marginally on Monday but failed again to break above 0.6220, which is the key short-term resistance area. The Reserve Bank of New Zealand will announce its decision on Wednesday.