USD/CNH grinds above 7.1200 on mixed China inflation clues

• USD/CNH struggles in reversing the previous day’s pullback from the highest levels since November 2022.
• China CPI drops to -0.2% MoM, improves to 0.2% on YoY whereas PPI marks heavy fall in May.
• US Dollar’s rebound after falling the most in two months also underpin Yuan’s weakness.
• Risk catalysts eyed for directions ahead of next weeks’ FOMC.

USD/CNH clings to mild gains around 7.1230 as it struggles to justify the latest inflation report from China early Friday. Not only the mixed results of inflation clues but the US Dollar’s consolidation also trouble the offshore Chinese Yuan (CNH) pair traders. That said, the pair initially refreshed the daily high to 7.1282 amid the first impressions of the data before falling to 7.1215 by the press time.

That said, China’s headline inflation gauges for May, namely the Consumer Price Index (CPI) and Producer Price Index (PPI), flashed mixed signals as the CPI drops on MoM but improves on YoY whereas the PPI marks a slump during the stated month.

Also read: China CPI: YoY actual 0.2% (forecast 0.2%, previous 0.1%, AUD steady

It should be noted that the US Dollar Index (DXY) also licks its wounds near 103.35, after posting the biggest daily loss in two months due to downbeat data, which in turn puts a floor under the USD/CNH prices.

That said, the DXY refreshed the weekly on Thursday after US Initial Jobless Claims rose to 261K in the week ended on June 02, the highest since October 2021, versus 235K expected and 233K prior (revised). With this, the four-week average rose to 237.25K from 229.75K previous readings. Further, the Continuing Jobless Claims dropped to 1.757M in the week ended on May 26 from 1.794M prior (revised), compared to 1.8M market forecasts. Earlier in the week, the US ISM Services PMI, S&P Global PMIs and Factory Orders also printed downbeat outcomes and pushed back the Fed hawks while weighing on the US Dollar.

On the other hand, multiple Chinese state banks including the Industrial and Commercial Bank of China, Bank of China and Construction Bank cut their benchmark rates. The same raises speculations that the Dragon Nation’s central bank, namely the People’s Bank of China (PBOC), will also cut the rates. The same might have weighed on the USD/CNH price of late, especially after the downbeat China inflation.

Further, the fears of China’s market intervention also favored the USD/CNH bears as PBoC Vice Governor said, “We have confidence, conditions and capacity to maintain stable operations of the FX market.” On the same line was Li Yunze, Director of China's National Administration of Financial Regulation, who also made upbeat remarks on the Chinese economy as he said, “Economy still recovering,” while adding that demand will be boosted.

Technical analysis

USD/CNH recovers from the 10-DMA support of around 7.1150 but overbought RSI challenges the pair buyers.