• NZD/USD is hoping to resume its upside journey towards 0.6300 on dismal US S&P PMI.
• A 75 bps rate hike by the Fed looks possible as economic data is not supporting a 1% rate hike.
• The kiwi bulls will focus on the ANZ Business Confidence data.

The NZD/USD pair is auctioning around 0.6250 after a minute correction on Friday as the kiwi bulls found barricades around the critical hurdle of 0.6300. The asset is likely to recapture its monthly high near 0.6300 as the Federal Reserve (Fed) is expected to maintain its status-quo and elevate its interest rate by 75 basis points (bps) in its monetary policy meeting on Wednesday. Rather than going all in for a 100 bps rate hike to tame soaring inflation.

Wall Street posted losses on Friday after dismal earnings from big boys, however, the sentiment in the FX domain remained upbeat as investors are seeing a consecutive rate hike by the Fed on Wednesday. The long-run inflation expectations indicator has displayed that the upside momentum in the price pressures in the US is displaying exhaustion. While the crucial Consumer Price Index (CPI) has not displayed any signal of a peak in the inflation rate.

The economic factor which may restrict the Fed to 75 bps and won't allow following the footprints of the Bank of Canada (BOC) is the downbeat S&P PMI released on Friday and expectations of slippage in employment data. Google reported a two-week halt in recruitment, while Ford announced plans to cut around 8,000 jobs. Expectations of lower headcounts by Google in upcoming quarters may weigh pressure on central banks and the impact of higher inflation will keep lingering on the economy.

On the kiwi front, investors will keep an eye on the release of the ANZ Business Confidence this week. The economic data is expecting an improvement to -55 than the prior release of -62.6. A higher-than-expected figure is likely to strengthen the kiwi bulls against the greenback.

The European Central Bank President Christine Lagarde said in an interview with Germany's Funke Mediengruppe published on Friday. the ECB will raise its interest rates until inflation falls back to its 2% target.

Key notes

The rate hike will only the latest step in our journey to unwind the special measures.
    
We will keep raising rates for as long as necessary to bring inflation down to our target over the medium term.

The governing council will review the situation and decide on the right pace for our next steps depending on the incoming data.

ECB hawk, Robert Holzmann, has also made comments:

• "The economy will grow less strongly, the forecasts point in this direction, that has made us somewhat cautious,"
• "We will see in the autumn what the economic situation is. Then we can probably decide if we do another 0.5% or less."
• ECB is keen to prevent higher inflation expectations becoming entrenched among the general public

Meanwhile, euro bulls have moved in from below parity in a correction of three prior weeks of supply. 

• EUR/USD stalls as the greenback bulls rethink ahead of the Fed

• Gold price is likely to display more upside after overstepping the critical resistance of $1,730.00.
• The DXY has tumbled significantly as the 1% rate hike expectations have been trimmed.
• Apart from the Fed policy, investors will also keep an eye on US Durable Goods Orders data.

Gold price (XAUUSD) is focused to recapture its weekly high near $1,740.00 after a firmer recovery. The precious metal gained strength last week after slipping to near the critical support of $1,680.00. A two-day stellar recovery by the gold bulls has resulted in a more than 3.30% recovery in the gold prices after re-testing the 11-month low of $1,679.80.

DXY tumbles as 1% rate hike odds get off the table

The US dollar index (DXY) surrendered the opening gains on Friday after the expectations of a 1% rate hike by the Federal Reserve (Fed) got trimmed tremendously. Thanks to the downbeat S&P PMI data and diving inflation expectations, which trimmed the odds of 100 basis points (bps) interest rate hike by the Fed in its monetary policy meeting on Wednesday.

After the long-run inflation expectations slipped to 2.8% from June’s print of 3.1%, investors placed bets on a consecutive 75 bps rate hike by the Fed rather than placing money on a 1% rate hike.

Downbeat S&P PMI data

On Friday, the S&P released the PMI data, which remained downbeat on major aspects. The Global Composite PMI remained extremely lower at 47.5 than the expectations of 51.7 and the prior release of 52.3. Expanding to the Manufacturing and Services front, the former catalyst landed at 52.3 vs. 52.7 the former figure, while the latter was recorded at 47 vs. 52.7 printed earlier. A downbeat PMI indicates that the Fed will not go entirely hawkish as economic activities are not favorable.

Other than Fed’s interest rate decision, the focus of investors will also remain on US Durable Goods Orders, which are due on Wednesday. The economic data is seen at -0.2%, significantly lower than the prior release of 0.8%.

• EUR/USD recovers from below parity and eyes key events. 
• The Fed and German inflation data are important for the week ahead.

EUR/USD bulls have moved in from below parity in a correction of three prior weeks of supply. The single currency ended down 0.13% on the final day of last week, falling from a high of 1.0255 and reaching a low of 1.0129. 

The euro has picked up a bid following a more hawkish rhetoric coming from the European Central Bank. The ECB has introduced a new Transmission Protection Instrument to keep sovereign bond yields in check while at the same time hiking rates by 50bps in a surprise move. 

However, at the same time, Italian politics has moved into the spotlight. ''The Italian political crisis was worsening while subsequent PMI data have suggested that recession risks for the Eurozone could be rising,'' analysts at Rabobank said.

''This news flow suggests that the ECB may be forced to show whether it can walk the walk and prevent a deepening crisis from developing in the region in the coming months. In view of recession risks, Italy’s collapsed government and a very strong USD, the ECB has a lot of cards stacked against it.''

The week ahead

Meanwhile, the week ahead will hold both key inflation numbers from the region as well as the Federal Reserve interest rate decision.

''German inflation likely fell for the second consecutive month due to a decline in fuel prices and a cut in energy taxes, while we think euro area inflation moved sideways in July,'' analysts at TD Securities said. 

''As we mentioned here, German and euro area inflation will remain “artificially” low until country-specific subsidies terminate at the end of August, thus resulting in a spike in September inflation.''

As for the Fed, the central bank is expected to follow up June's large 75bp rate increase with a similar move in July, lifting the target range for the Fed Funds rate to 2.25%-2.50%. 

• AUD/USD ended on the front foot for the week ahead of key inflation data. 
• The US dollar is in focus as traders get set for the Fed. 

AUD/USD came under pressure on Friday in the final stages of the New York day, falling 0.14% from a high of 0.6977 to print a low of 0.6893. However, the US dollar has also been giving ground back to the antepodenas due to a retreat in US rate hike expectations while in contrast, they are building up for the Antipodes that were ending with solid gains for the week

The US dollar came under pressure last week due to a better risk mood while rival currencies that are playing catch up with their central banks moving more in line with the Federal Reserve. The European Central Bank raised interest rates by more than expected, while mixed US data last week has had money markets paring back expectations for a super-sized US rate hike. This has weighed on US yields.

Meanwhile, the FOMC is expected to follow up June's large 75bp rate increase with a similar move in July. ''In doing so, the Committee would bring the policy stance to its estimate of the longer-run neutral level,'' analysts at TD Securities said. ''We also look for Chair Powell to retain optionality by leaving the door open to additional 75bp rate increases.''

Meanwhile, Australian Consumer Price index data this week is expected to come in hot and in line with an uber hawkish Reserve Bank of Australia rhetoric. Analysts at TD Securities explained to expect outsized headline/ underlying prints vs consensus. ''The magnitude of the increases for the main drivers are: 1) Housing 3.2% QoQ; 2) Food 2.25% QoQ; 3) Transport 2.3% QoQ; 4) Household Services 1.65% QoQ & 5) Recreation 1.2% QoQ. Our headline f/c implies the peak is likely to exceed the RBA's 7% year-end target & warrants at least a 50bps Aug hike.''

As for how far the RBA will need to go to tame inflation with Australia's benchmark cash rate, NAB now expects it to peak at 2.85% by the end of the year, while Westpac sees the peak at 3.35% by February next year. Both previously forecast a peak of 2.6%. Markets are pricing about a 15% chance of a 75 basis point rate hike in August. 

From a bullish perspective, analysts at Rabobank expect AUD/USD to hold around current levels on a 1-to-3-month view, but they see scope for the currency pair to edge up to 0.70 on a 6-month view and 0.74 in 12 months.