The renminbi remained under pressure last week after the US imposed new tariffs on Chinese goods, risking a prolonged trade war. The USD/CNY exchange rate rose to 7.2877, its highest level since January 21. So, what next for the Chinese yuan?
China economic slowdown
The USD/CNY exchange rate rose slightly after data revealed that China’s inflation remained weak in January. According to the statistics agency, the headline consumer price index rose from 0.0% in December to 0.7% in January, missing the analyst estimate of 0.8%.
This inflation growth translated to an annual rate of 0.5%, higher than the median estimate of 0.4%. Meanwhile, the producer price index (PPI) remained in a deflation, as it dropped by 2.3% during the month.
These numbers meant that China’s inflation remained low in January, a sign that the economic slowdown continued.
China’s weakness may continue this year as a trade war started with the United States, a key trading partner. Donald Trump implemented huge tariffs on Chinese goods worth over $450 billion a year. China has also implemented more tariffs, which will take effect this week.
It is still too early to determine the impact of these tariffs on the Chinese economy. One of the potential impacts is that US buyers of Chinese goods pause their purchases as they wait for a trade settlement.
However, China’s economy will likely continue doing well in the long term since Americans will pay these tariffs.
The other impact is that the People’s Bank of China (PBoC) will start cutting interest rates this year to supercharge the economy.
US inflation data ahead
The next important catalyst for the USD/CNY exchange rate will be the US release of the latest inflation data on Wednesday.
Economists expect the report to show that the headline CPI slowed from 0.4% in December to 0.3% in January. They see the data remaining unchanged at 2.9% year over year.
US core CPI is expected to rise from 0.2% in December to 0.3% in January. This increase will then translate to a YoY growth of 3.2%.
If correct, these numbers mean that US inflation remains hot, putting the Fed in a tight spot. Analysts expect that the Fed will hold rates steady in the coming months and start cutting in its July meeting.
Therefore, a combination of a hawkish Fed and a dovish PBoC may put pressure on the renminbi in the coming months.
Read more: January jobs report: hiring expected to cool, unemployment steady as 2025 begins
USD/CNY technical analysis
USDCNY chart by TradingView
The daily chart shows that the USD to CNY exchange rate bottomed at 7.2375 in January and then bounced back to 7.2877, its highest level since January 2021.
It has risen above the crucial resistance at 7.2764, the highest swing in January 2024. The pair has also crossed the 50-day Exponential Moving Average (EMA) and moved above the top of the trading range of the Murrey Math Lines at 7.2750.
Therefore, the pair’s path of least resistance is upward. The next reference level to watch is 7.3340, the strong pivot reverse, and the highest level in January.
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