Recently, China's financial market has been following the upcoming August inflation data, which seems to be a test of Beijing's economic strategy. Today's offshore yuan (CNH) has remained relatively stable, with the USD/CNH Exchange Rate slightly decreasing to 7.1134. Against this backdrop, China's Consumer Price Index (CPI) will be released on Wednesday morning, triggering concerns about the health of domestic demand.

The CPI is expected to decrease by 0.2% year-on-year in August, compared to 0% in July. Such data may once again raise concerns about domestic demand in China. As a trust test of Beijing's economic policy, forex traders are closely watching this data. Today, the People's Bank of China (PBoC) set the benchmark USD/CNY exchange rate at 7.1008, slightly lower than the previous day, indicating a tendency to control the depreciation of the renminbi.

Technical analysis shows that the USD/CNH currency pair has maintained a downward trend since the beginning of the year. Despite a brief rebound, the pair has shown a continued decline at new lows since November of last year. The next important support level is around 7.1000, and a break below this area could see the Exchange Rate continue to fall to 6.9713.

Although the Chinese economy shows some resilience, with GDP growing by 5.3% in the first half of this year, the slowdown in industrial activity and the contraction in manufacturing investment indicate signs of weakening momentum. Nevertheless, inflation may decline again. It is expected that the CPI in August will decrease by 0.2% year-on-year, and some analysts believe it could drop to 0.4%. The Producer Price Index (PPI) also shows a negative trend, with ongoing deflation in the industrial sector, reflecting weak final demand and falling raw material prices.

For Beijing, they are facing increasing economic pressure. Measures to reduce overproduction and support prices may impact employment in the short term. The key to achieving economic development strategies lies in whether the government can continue to support domestic demand.

Despite the government's implementation of consumption subsidies, child allowances, and interest rate adjustments, the slowdown in retail sales highlights that spending remains fragile. The upcoming August CPI data will not just be a simple indicator; it will serve as a barometer for the credibility of China's economic policy. If this data confirms a move into deflation, the market may anticipate a stronger response, possibly in the form of monetary easing or new fiscal support measures.

In this case, unless there is a positive price surprise or political changes, the RMB may continue to strengthen against the USD in the short term.

**Disclaimer: This article is for reference only and does not constitute investment advice. Past performance does not guarantee future results.**