USD/CNH stays pressured around 6.7300 on firmer China data, PBOC MLF ahead of Fed

• USD/CNH extends the previous day’s pullback from monthly high.
• China Retail Sales improved, Industrial Production reversed previous contraction in May.
• PBOC injects CNY 200 billion while keeping one-year MLF unchanged at 2.85%.
• Fed Chair Powell’s ability to tame inflation, recession woes and meet market expectations will be a test.

USD/CNH holds lower ground near the intraday bottom surrounding 6.7250, near 6.7350 by the press time, as strong China data joins the People’s Bank of China’s (PBOC) action to please the bears during early Wednesday. Also exerting downside pressure on the offshore Chinese yuan (CNH) pair is the US Treasury bond yields’ retreat.

China’s Retail Sales improved to -6.7% versus -7.1% expected and -11.1% prior while the Industrial Production reversed -0.7% forecast with 0.7% expansion during May. Earlier in the day, Australia’s Westpac Consumer Confidence for June dropped below -0.7% market forecasts to -4.5%, versus -5.6%.

PBOC injected CNY200 billion via one-year medium-term lending (MLF) facility on Wednesday. Additionally, the Chinese central bank also matched wide market expectations while keeping the rate for one-year MLF operation rate unchanged at 2.85%.

On the other hand, a softer US Producer Price Index (PPI) for May allowed the US bond coupons to retreat from the 11-year high and trigger a pullback in the US dollar ahead of the key Federal Open Market Committee (FOMC).

The US PPI matched 0.8% MoM forecasts, also easing to 10.8% YoY figures versus 10.9% expected and prior readouts. The PPI ex Food & Energy, known as Core PPI, dropped below 8.6% YoY forecasts to 8.3%.

US 10-year Treasury bond yields drop 5.6 basis points (bps) to 3.43% as the bond coupons ease from the fresh high since 2011. The same underpins the mildly bid S&P 500 Futures around 3,750 and weighs on the USD/CNH afloat.

Looking forward, major attention will be given to the Fed’s interest rate decision and the economic forecasts as Chairman Jerome Powell has a tough task of pleasing markets and taming inflation at the same time.

It’s worth noting that the US diplomats have recently pushed the Fed, indirectly, towards aggressive action, which in turn propelled the market’s expectations of a 75 bp rate hike from the US central bank. White House (WH) Economic Adviser Brian Deese and National Economic Council Deputy Director Bharat Ramamurti were among the US diplomats who highlighted the inflation woes and showed readiness to battle the same during their interviews with CNN and Bloomberg respectively. The same enables the CME’s FedWatch Tool to print 99% probabilities for a 75 bp rate increase during today’s meeting.

Other than the Fed, US Retail Sales for May, expected 0.2% MoM versus 0.9% prior, will also be important to watch for USD/CNH. Additionally, the covid conditions and the Sino-American tussles are extra catalysts to watch for the pair traders.

Read: Fed June Preview: In the world we live in, a 50 bps hike is a dovish surprise

Technical analysis

A one-week-old ascending trend line joins the previous resistance line from May 13 to highlight 6.7200-7150 is the key support. Alternatively, recovery moves need validation from monthly horizontal resistance near 6.7900.