Markets remain calm ahead of Wednesday's US inflation data. A big downside surprise would be required to fuel a more meaningful reversal of US dollar strength, in the opinion of economists at MUFG Bank.

AUD/USD remains on the backfoot amid looming China-Taiwan risks. Higher copper and iron-ore prices combined with softer USD cap aussie’s losses. Bulls remain hopeful while above 100 DMA ahead of the key US inflation data.

“The hot dry weather that boosted nominal sales growth in July will have potentially negative consequences as well. Natural gas supply uncertainty is likely to be reinforced by hydro-powered electricity supply as well. The government in Norway is now prioritising refilling its reservoirs and could limit exports of electricity if the situation worsens.” 

“The outlook for consumer spending remains grim with the potential for much greater public sector strike action than on the continent. The nursing union RCN – is recommending strike action by its 465K members which would be the first-ever strike by nurses in the UK.” 

“GBP/USD will be unable to hold levels above 1.2000 as downside risks persist.”

 

USD/CAD attracts some buying on Tuesday, though the uptick lacks bullish conviction. Weaker crude oil prices undermine the loonie and extend some support to the major. The risk-on mood weighs on the safe-haven USD and keeps a lid on any further gains.

EUR/USD has gained traction following a quiet Asian session on Tuesday. The pair could struggle to extend its recovery in the short term. Investors might remain on the sidelines ahead of Wednesday's key data releases.

EUR/USD advances for the second session in a row and extends the optimism seen at the beginning of the week, as the greenback continues to give away its post-NFP gains on Tuesday.

The pair’s recovery, however, stays so far within the broader 1.0100-1.0300 consolidative range that has been in place since mid-July, always against the backdrop of recession talk on both sides of the Atlantic as well as speculations over the next steps regarding an interest rate hike by both the Fed and the ECB.

Nothing scheduled data wise in Euroland on Tuesday, whereas minor releases are expected across the pond, namely, the NFIB Business Optimism Index and the IBD/TIPP Economic Optimism Index.

“Ahead of the inflation data from Germany and the US on Wednesday, market participants could refrain from betting on further euro strength.”

“EUR/USD is closing in on 1.0230, where the Fibonacci 38.2% retracement of the latest downtrend is located. Even if the pair manages to rise above that level, it could meet strong resistance at 1.0250 (200-period SMA on the four-hour chart). Only a four-hour close above that level could be seen as a bullish development and open the door for an extended recovery toward 1.0300 (psychological level, Fibonacci 50% retracement).”

“Initial support is located at 1.0200 (100-period SMA, 50-period SMA). If sellers flip that level into resistance, 1.0150 (Fibonacci 23.6% retracement) and 1.0100 (psychological level, static level) could be seen as the next bearish targets.”

 

“The Bank of Japan (BOJ) expects prices to rise more quickly than officials had anticipated at their July meeting,” MNI reports, citing people familiar with the central bank's thinking.

But the sources added that the jump in inflation to 3% or higher later this year, however, will not be enough to prompt any shift in its easy policy stance unless it feeds into an acceleration of wages next spring.

According to a study by the Institute for Employment Research (IAB), Germany’s economy will lose more than EUR260 billion ($265 billion) in added value by 2030 due to the Russia-Ukraine war and high energy prices, Reuters reported on Tuesday.

USD/JPY is seen oscillating in a narrow trading band around the 135.00 mark on Tuesday. Recession fears, US-China tensions underpin the safe-haven JPY and seem to cap the pair. The Fed-BoJ policy divergence acts as a tailwind ahead of the US CPI report on Wednesday.

The index adds to the pessimism in the first half of the week. US yields remain apathetic ahead of key CPI release. NFIB Index, IBD/TIPP Index next on tap in the docket.

Here is what you need to know on Tuesday, August 9:

The market action remains relatively subdued on Tuesday as investors refrain from making large bets ahead of Wednesday's Consumer Price Index (CPI) data. The US Dollar Index (DXY) fluctuates in a narrow range above 106.00, US stock index futures stay flat in the European morning and the benchmark 10-year US Treasury bond yield moves sideways slightly below 2.8%. There won't be any high-impact data releases from the euro area and the US economic docket will feature the NFIB Business Optimism Index, Unit Labor Costs for the second quarter and the IBD/TIPP Economic Optimism Index data later in the day.

US CPI Preview: It is the hard core that counts, five scenarios for critical inflation data.

Meanwhile, the Chinese military said that it will continue its drills around Taiwan on Tuesday. This development, however, doesn't seem to be...

Gold witnesses some selling on Tuesday and reverses a part of the previous day’s positive move. A generally positive tone around the equity markets acts as a headwind for the safe-haven metal. Sliding US bond yields keep the USD on the defensive and seem to offer support to the XAU/USD.

EUR/USD remains listless in the middle of a 1.01-1.03 range. Economists at ING expect the world’s most popular currency pair to trade down near the 1.00-1.02 area for the rest of 2022.

In the United Kingdom, attention should be paid to the Conservative Party leadership race, set to run until September. A victory of Foreign Minister Liz Truss would weigh on the British pound, in the opinion of economists at Mizuho Bank.

A very quiet Monday and what looks the same again today has seen the dollar soften slightly across the board. Dollar stability can allow some interest in high yield  emerging markets (EM) FX, economists at ING report.

“We had felt that 0.8450 might prove the top of a near-term trading range – despite the Bank of England's bleak prognosis last week.”

“There still does not seem a compelling case for EUR/GBP to trade substantially higher, but we acknowledge that a break of 0.8450 can carry EUR/GBP to the 0.8485/8500 area.”

 

EUR/JPY picks up bids to reverse the week-start pullback, grinds higher around daily top. Yields consolidate previous day’s losses amid a sluggish session. Japan Machine Tool Orders, fewer challenges for BOJ appear to favor the pair buyers.

The Bank of England (BoE) delivered a dovish 50 bps hike, as widely expected and the GBP weakened. An inverted curve amid increasingly worrying signs about future growth points to further GBP underperformance, in the view of economists at HSBC.

NZD/USD edges lower on Tuesday, though the downside remains cushioned amid softer USD. Recession fears and US-China tensions seem to act as a headwind for the risk-sensitive kiwi. Sliding US bond yields keep the USD bulls on the defensive and should help limit deeper losses.

"Regional challenges continue to grow. Risks to Eurozone gas shutoff continue to rise, which should weigh on local growth, while Covid-19 policies in Asia may continue to restrict the recovery.... This should be positive for the USD. Indeed, for investors increasingly looking for safety, the "King Dollar" may indeed still be king. This could even be true across asset classes.”

"Say an investor is looking for a safe haven and she is choosing between the USD in FX or a Treasury note. Both are often viewed as safe havens, but it's worth remembering that the USD has positive returns relative to Treasuries in a world where rates keep rising." 

In the view of economists at Mizuho Bank, the markets are now focusing on the possibility of a recession, so investors will need to monitor global economic trends going forward. They expect the USD/CAD pair to trade in a range from 1.27-1.32 in August.

Considering advanced prints for natural gas futures markets from CME Group, open interest shrank for the third session in a row on Monday, now by nearly 11K contracts. On the other hand, volume clinched the second consecutive daily build and this time increased by around 21.8K contracts.