This morning’s CPI Report indicated a lower than expected rise in the inflation rate. This sent a signal to traders that the Fed will probably announce that they will not raise interest rates in September as some have speculated. This announcement is likely to be contained in next week’s FOMC statement.

Traders originally were buying Dollars around midnight (CDT) when the stock market started to break. Traders were shying away from risky assets in anticipation of a sharp break in the equity markets. Shortly before the CPI report was released, the Dollar topped almost as if the number had been leaked. By the time the government reported that U.S. consumer prices edged up to 0.1% in May, the break in the Dollar had started.

The CPI report indicates that inflation is not yet the issue that traders speculated it would be following months of Treasury debt auctions. Based on the results of this report, it looks as if the debate will rage on as to when high inflation will return.

This report also confirms what the Fed has been saying and that is, inflation will not be an issue this year.

Now that this CPI Report is out of the way, traders have one week to wait for the Fed’s announcement. This will be an important FOMC meeting since the Fed will skip July and meet again in August. The Fed will most likely draft a comprehensive statement in order to cover the sixty-day gap between meetings. This means Forex traders may overreact to its statement.

Although this week has been highlighted by slow, directionless trading, next week is likely to be highly volatile. At this time it is best to follow the short-term trend and to pay close attention to the retracements. Currently the technical patterns are showing a stronger Dollar as long as the highs from two weeks ago continue to hold.

If you look at the charts you will see a broad range from the March/April bottom to the June high. Expectations are for the Dollar to remain strong until the Dollar makes a minimum 50% retracement of this range.

Canadian Dollar, Australian Dollar and New Zealand Dollar traders should watch the commodity markets especially crude oil and gold. If these two markets drop further then they will likely drive the commodity-linked currencies lower.

Trade only if you have to this week because the volatility is coming.

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