Euro, yen and gold in the wake of closely-waited US inflation data

As traders awaited the US inflation data due later in the week to be released, the dollar hovered just below recent highs on Tuesday. In recent sessions, European stock market indices have surged higher, aided by generally upbeat corporate earnings announcements, which have helped lift the market. Additionally, it is possible that soon, the Federal Reserve will start ceasing to be as aggressive with its interest rate increases as it has been in the past. Considering the fact that the US economy, the world's largest, has now entered into a technical recession, this is not surprising.

A drop in inflation may be a sign that the economy has cooled enough for the Federal Reserve to ease its current tightening pace, which brings the consumer price index for Wednesday into sharp focus. 

Gold

The price of gold held steady on Tuesday as the volatility in stock markets before this week's closely-watched US inflation figure drove up demand for safe-haven assets such as gold. The analysts look for the year-over-year reading to fall to 8.7% from 9.1% in June, according to the consensus forecast. Inflation data falling to a larger degree than expected is likely to undermine expectations of a steep rise in interest rates by the Federal Reserve. This is likely to boost gold prices.

On the other hand, a stronger-than-expected reading could trigger a rise in US Treasury yields. This could cause more traders to flock to the dollar and dent most metal markets.

EUR/USD

In the EUR/USD chart, the pair is still hovering around the 1.02 level, waiting for the dollar to soften on the back of some good news before hoping to make a further attempt toward the 1.0350 mark, where the 50-day moving average stands. It is clear from the ECB perspective that there isn't much upside potential from the side of the ECB, and this is because the ECB played its major cards at the last meeting. In order to enable the EUR/USD to gain ground, the dollar must soften. Moreover, the dollar needs some easing of inflation to give up some of its advantages.

USD/JPY

In the dollar-yen market, traders are now calling the end of what has been a remarkably successful long USD/JPY trade this year. Although the divergence between a more aggressively hawkish Fed and an overly dovish Bank of Japan (BoJ) remains in favour of a stronger dollar, most of the price action has already been played out. Profit taking will likely take place, and USD/JPY's value will retrace to at least below the 130 support level, which has been tested since the beginning of the month. Suppose the dollar was to soften across the board in conjunction with a softer inflation level. In that case, this support level could easily be broken to the downside.