USD/CNH eyes second weekly gain above 6.8600 ahead of Fed Chair Powell’s Jackson Hole speech

• USD/CNH picks up bids to consolidate the biggest daily loss in a fortnight around two-year high.
• Covid woes, fears of economic slowdown and geopolitics keep buyers hopeful.
• Fedspeak, mixed US data and downbeat yields allowed seller’s entry earlier.
• Powell’s defense of rate hike, US PCE inflation data will be important for fresh impulse.

USD/CNH clings to mild gains around 6.8620 heading into Friday’s European session, after declining the most in two weeks the previous day. In doing so, the offshore Chinese yuan (CNH) pair seesaws near the highest levels in two years, marked on Wednesday, while bracing for the second weekly gain.

China’s attempt to defend the world’s second-largest economy with heavy stimulus, recently by one trillion yuan, appeared to have triggered optimism at home as multiple policymakers and domestic authorities joined hands to avoid recession. However, Bloomberg raises doubts on the recovery attempt by citing recently weaker fundamentals and grim conditions of the housing market.

On the other hand, China’s State Council-affiliated newspaper Economic Daily mentioned, per Reuters, "The yuan will remain flexible and has two-way volatilities in the mid-to long-term, while generally staying basically stable at reasonable and balanced levels," the newspaper said in a front-page commentary.”

Elsewhere, a covid-led lockdown near Beijing joined the US suspension of 26 Chinese carrier flights in response to China’s action to weigh on the risk appetite. Also, Taiwan’s increased military budget and a jump in the number of US diplomats visiting Taipei raised geopolitical woes and underpinned the US dollar’s safe-haven demand. On the same line is US President Joe Biden’s hard stand on Iran’s position in Syria.

It should be noted that the mildly positive US data and mixed Fedspeak favored the risk-on mood the previous day, which in turn portrayed the biggest USD/CNH fall in two weeks.

Amid these plays, the S&P 500 Futures part ways from Wall Street’s gains and print mild losses around 4,195. Additionally portraying the risk-off mood is the three basis points (bps) of an increase in the US 10-year Treasury yields, at 3.055% by the press time.

To sum up, the Chinese currency remains on the bear’s table and can decline more if Fed Chair Powell successfully defends the hawkish moves, as well as signal more rate hikes. Additionally important is the US Core Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred inflation gauge. Forecasts suggest that the YoY print is to ease to 4.7% from 4.8% while the monthly figures may drop to 0.3% while 0.6% prior.

Technical analysis

USD/CNH remains on the way to March 2020 low near 6.9050 unless providing a daily close below the May 2022 peak surrounding 6.8385.