The United States Dollar, after a steady performance in the front half of this week, is in freefall this morning after US CPI figures showed prices unexpectedly shrank last month.
Overview
Core inflation also slowed on a monthly and annual basis, showing price growth slowing to 3..3%, and placing the Buck firmly in the backseat today. The Bloomberg Dollar Spot Index fell 0.7% immediately following the release, and USD is near its monthly weak point against the majority of the G10.
After Jerome Powell said to Congress repeatedly over the last two days that the Fed was looking for further signs of slowing prices, it appears markets are taking this morning’s data as exactly that sign. Not only was monthly inflation below market consensus, it was below all economists’ expectations. Overnight swaps on US interest rates have moved fairly dramatically, and traders now see an 89% chance that the Federal Reserve will cut interest rates by 25 basis points in September. Though markets have long moved ahead of the Fed in pricing in an easing cycle and are still calling for two interest rate cuts this year, whether or not the Fed will adjust its own expectations remains to be seen. This does, however, mark the second consecutive month that price growth has either remained flat or contracted, moving below market expectations.
The US Producer Price Index, another key inflation reading, is due out tomorrow morning, but it’s more likely than not that today’s release is the big shift that markets have been waiting for. Tomorrow’s PPI, should it read soft, would be taken as further confirmation that price pressure is, in fact, easing. Jerome Powell also stated this week that he is ‘confident’ that the labor market is no longer a creationary factor in price pressure, but JOLTS job openings did unexpectedly grow last month, so he may be looking for further confirmation on that side of the Fed’s dual mandate.
What to Watch Today…
- US PPI, Friday 8:30AM
- Monex USA Online is always open.
JPY ⇑
Japanese Yen, after consistently underperforming the G10 through the last two months, is currently the best-performing currency on the G10 board, following today’s soft inflation figures from the US. At the time of writing, JPY has gained roughly 2% of ground on the Dollar, at one point gaining as much as 2.4%. US treasury yields fell dramatically following this morning’s data, and traders hypothesize that any potential intervention from Japanese currency officials may be funded by the sale of their US treasury holdings. JPY is having an outsized reaction to today’s release in comparison with the rest of the majors.
CAD ⇑
The Canadian dollar is lagging quite far behind its G10 peers on the release of US inflation data, only posting a slight gain of less than a tenth of a percent against USD. The strong economic ties between the US and Canada, coupled with Canada’s own stagnant economy, are keeping today’s Dollar-negative move at bay for the USDCAD pair.
