Forex News

National Bank of Canada's (NBC) Jocelyn Paquet analyzes how China’s sharp reduction in petroleum imports helped offset the Middle East supply shock and limit Oil price gains. The July rebound in Chinese imports is highlighted as historically large in percentage terms. Paquet stresses that future trends in Chinese demand will be as important as Middle East developments for determining global energy prices.

China’s imports and global oil pricing

"For there is no doubt that the reduction of no less than 5 million barrels per day (or 41.4%) in China’s petroleum oil imports between March and June is one of the main reasons that has helped keep prices under control."

"Combined with the release of strategic reserves, this reduction has made up for the global shortfall and kept shortages in other countries to a minimum."

"But just as the decline in Chinese demand has helped cap prices, a potential recovery could have the opposite effect in the future if the Strait were to remain closed for an extended period."

"Imports of petroleum products indeed rose by 1.2 million barrels per day during the month (or 22.1%)."

"Granted, it is difficult to know whether this rebound will continue in the coming months—China could theoretically continue to draw on its reserves and keep its import levels low for several more months—the fact remains that trends in Chinese demand will play a role just as important as developments in the Middle East in determining future energy prices."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• EUR/USD trades little changed around 1.1550 after a brief spike in volatility triggered by the US inflation data.
• US inflation eases to 3.4% in July, while core inflation comes in at 2.5%, in line with expectations.
• Tensions surrounding the Strait of Hormuz limit risk appetite, while accelerating German inflation provides only limited support to the Euro.

EUR/USD trades around 1.1550 on Wednesday at the time of writing, up a modest 0.08% on the day. The pair experienced a brief spike in volatility following the release of United States (US) inflation data but quickly returned to levels seen before the publication, as the figures broadly match market expectations.

Inflation in the US, as measured by the Consumer Price Index (CPI), slowed to 3.4% YoY in July from 3.5% in June, according to the Bureau of Labor Statistics (BLS). On a monthly basis, prices rose by 0.1%, following a 0.4% decline in June. The core CPI, which excludes volatile food and energy components, increased by 0.2% MoM and 2.5% YoY. All the figures align with market forecasts.

The reaction of the US Dollar (USD) remains subdued, as the data provide no significant surprise likely to materially alter expectations regarding the Federal Reserve's (Fed) monetary policy outlook. The US Dollar Index (DXY), which measures the value of the Greenback against a basket of six major currencies, edges slightly lower following the release.

On the European side, the Euro (EUR) receives little support from accelerating German inflation. Germany's Harmonized Index of Consumer Prices (HICP) confirmed a 2.8% YoY increase in July, up from 2.4% in June. The acceleration is mainly driven by energy prices, which rose 7.3% from a year earlier, compared with 2.7% in the previous month. Excluding food and energy, inflation also accelerated to 2.6% from 2.5% in the previous month.

These figures reinforce expectations of a potential monetary policy tightening by the European Central Bank (ECB) in September. However, their positive impact on the Euro remains limited as investors also focus on the deteriorating geopolitical backdrop in the Middle East.

Concerns surrounding the peace process between the US and Iran return to the forefront following reports of attacks on vessels attempting to cross the Straits of Hormuz and Bab el-Mandeb. According to Reuters, a senior Iranian source says that no discussions are currently underway regarding an extension of the ceasefire between Washington and Tehran.

Caution also intensifies after US President Donald Trump called on Tehran to pay reparations to victims of attacks linked to the Islamic Republic. These developments reduce hopes for a swift reopening of the Strait of Hormuz and maintain a risk-averse environment that, for now, prevents EUR/USD from benefiting more significantly from the modest weakness of the US Dollar.

EUR/USD technical analysis

In the one-hour chart, EUR/USD trades at 1.1546, holding a mildly bullish intraday bias as it remains above both the 100-period simple moving average (SMA) at 1.1541 and the 200-period SMA at 1.1533. The pair is grinding higher from the day’s open at 1.1541, while the Relative Strength Index (RSI) around 60.75 suggests firm but not extreme upside momentum, hinting that buyers retain near-term control as long as price stays over these moving averages.

On the topside, initial resistance appears at the horizontal barrier near 1.1560, ahead of a higher cap at 1.1581, where fresh selling interest could emerge. On the downside, immediate support is provided by the clustered 100- and 200-period SMAs at 1.1541 and 1.1533, followed by the intraday floor at 1.1515 and deeper structural supports at 1.1500 and 1.1480, levels that would need to give way to undermine the current constructive tone.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Annual inflation in the United States (US), as measured by the change in the Consumer Price Index (CPI), declined to 3.4% in July from 3.5% in June, the US Bureau of Labor Statistics (BLS) reported on Wednesday. This print came in line with the market expectation.

On a monthly basis, the CPI rose by 0.1% following the 0.4% decline recorded in the previous month. The core CPI, which excludes volatile food and energy prices, increased by 0.2% and 2.5% on a monthly and yearly basis, respectively. All these figures matched analysts' forecasts.

Market reaction to US July inflation data

The US Dollar (USD) Index edges slightly lower with the immediate reaction to inflation data and was last seen losing 0.1% on the day at 99.70.

This section below was published as a preview of the US July inflation data at 08:30 GMT.

• The US Consumer Price Index is expected to rise by 3.4% YoY in July, down slightly from the 3.5% advance seen in June.
• Annual core CPI inflation is expected to edge lower to 2.5% from 2.6% previously.
• EUR/USD technical outlook highlights bulls’ hesitancy in the near term.

The US Bureau of Labor Statistics (BLS) will publish the July Consumer Price Index (CPI) data on Wednesday. The report is expected to show a small decline in consumer inflation and core inflation. 

The monthly CPI is forecast to rise by 0.1%, following the 0.4% decrease recorded in June, while the annual reading is seen retreating to 3.4% from 3.5% reported in the previous month. Core CPI figures, which exclude volatile food and energy prices, are expected to post an increase of 0.2% and 2.5%, on a monthly and yearly basis, respectively. 

Following a nearly 16% drop in May, Crude Oil prices declined roughly 20% in June and came back to pre-war levels, as investors cheered news of the US and Iran reaching a ceasefire on June 17 to start negotiations to bring an end to the conflict. As a result, CPI inflation softened at a much faster pace than expected in June.

US inflation seen rebounding as services and core goods firm

According to TD Securities, July inflation data are likely to show a modest increase after June’s temporary softness. The bank expects that “July core CPI likely rebounded after June’s one-off weakness, rising 0.20% m/m as services inflation reaccelerated, led by rents/OER, airfares, medical, and recreation.” TD also highlights that “core goods likely posted their first increase in three months,” while “headline CPI likely rose 0.15% m/m, with lower gasoline offset by faster grocery prices.” Overall, TD cautions that “upside risks remain” around the upcoming release.

What to expect in the next CPI data report?

As the US and Iran failed to find an agreement to reopen the Strait of Hormuz and started exchanging military attacks, crude Oil prices recovered in July, with the barrel of West Texas Intermediate (WTI) rising nearly 22% in the month. Nevertheless, news of Iran and Oman working on a deal to manage the waterway helped Oil prices ease in the first week of August. Combined with the disappointing July labor market data from the US, which showed that Nonfarm Payrolls (NFP) unexpectedly declined by 23K, investors scaled back bets for a Federal Reserve (Fed) rate hike in September. 

According to the CME Group FedWatch Tool, markets are currently pricing in about a 52% chance of a 25 basis points (bps) increase in interest rates at the next policy meeting.

Still, markets remain sceptical about a policy hold after Oil prices started to push higher this week, with Iran saying that an agreement with Oman would not be enough to resume activity in the Strait of Hormuz unless the US agreed to a list of conditions. 

Analysts at OCBC argue that the bar for a meaningful shift in Fed expectations remains elevated, noting that “core CPI would need to print at 0.3% MoM or higher in July, above the 0.2% consensus forecast, to materially lift expectations of a September rate hike.” In their view, a “rangebound USD, combined with a constructive risk backdrop, should continue to support carry trades despite ongoing volatility in oil markets.” They add that recent “oil prices eased on hopes that the Strait of Hormuz could reopen, but Iran's firm conditions for Washington suggest any near-term boost to energy supply is likely to be limited,” keeping the outlook for energy markets finely balanced. 

How could the US Consumer Price Index report affect EUR/USD?

Markets will pay close attention to the monthly core CPI print to see how volatile energy costs are spreading into the wider economy. A monthly core CPI increase of 0.3% or higher, in addition to the elevated uncertainty surrounding the Oil price outlook, could revive expectations for a Fed policy tightening step in September and boost the US Dollar (USD) with the immediate reaction. In this scenario, EUR/USD could come under renewed bearish pressure.

Conversely, a core CPI reading below the market expectation of 0.2% could cause the USD to weaken and pave the way for a leg higher in EUR/USD. 

Since CPI is a lagging indicator, the market reaction could remain short-lived. Instead, investors are likely to continue to assess changes in Oil prices. Even if the monthly core CPI surprises to the upside, a decline in Oil prices could allow market participants to lean toward a Fed policy hold and hurt the USD. On the other hand, investors could ignore soft inflation data for July in case tensions escalate further in the Middle East, pushing energy costs higher. 

Eren Sengezer, European Session Lead Analyst, shares a brief technical outlook for EUR/USD:

“EUR/USD climbed slightly above a descending trend line drawn from late-January but lost its traction after testing the 100-day Simple Moving Average (SMA), currently located near 1.1570. Additionally, the Relative Strength Index (RSI) indicator on the daily chart retreated below 60, reflecting a loss of bullish momentum.”

“On the upside, 1.1570 (100-day SMA) aligns as an interim resistance level before 1.1630 (200-day SMA). A daily close above this latter resistance could be seen as a significant bullish sign and open the door for an extended rally toward 1.1800 (static level). Looking south, the first support level could be spotted at 1.1470 (20-day SMA, 50-day SMA) ahead of 1.1350-1.1330 (static level, lower boundary of the Bollinger Bands).”

Analysts at UOB Group note that “there has been no significant increase in upward momentum, and the hurdle for further gains has risen, with EUR needing to close above 1.1580 before a move to 1.1600 and beyond can be expected.” In addition, the bank now places the “‘strong support’ level” higher, at “1.1515 instead of 1.1495,” underscoring a tighter trading band as the Euro consolidates.