EUR / USD
The dollar edged weaker into the latest US inflation data with the Euro edging towards 1.0250 as markets appeared to be positioned for lower headline inflation.
Consumer prices were unchanged on the month compared with expectations of a 0.2% increase. The year-on-year rate declined to 8.5% from the 40-year high of 9.1% and below consensus forecasts of 8.7%. Energy prices declined 4.6% on the month, although there was still a 32.9% annual increase while gasoline prices dipped 7.7% on the month to give a 44% annual increase. Food prices increased1.1% on the month to give a 10.9% annual increase.
Underlying prices increased 0.3% for the month, also below expectations of 0.5%, with the annual rate holding at 5.9% and below expectations of 6.1%. Used car prices declined on the month and there was a marginal decline for apparel while transport services prices also edged lower on the month.
Following the lower than inflation data, there was a shift in expectations surrounding Federal Reserve policies with markets now expecting that there will be a further 50 basis-point rate hike at the September meeting rather than 75 basis points.
There was also a sharp boost to risk appetite which undermined the US currency and the dollar overall weakened sharply after the release amid a huge tone of relief. The dollar index dipped to 5-week lows while the Euro jumped to above the 1.0300 level. The dollar continued to lose ground towards the European close with a Euro test of the important 1.0350 area while the dollar also posted sharp losses against commodity currencies. The Euro peaked at 1-month highs close to 1.0370 before a retreat to the 1.0300 area as the dollar recovered some territory. The dollar continued to recover some ground on Thursday with the Euro trading around 1.0290.
Treasuries rallied strongly after the US inflation data with the 10-year yield sliding to below 2.70% and the US 2-year yield also dipped sharply to around 3.10% from 3.27%. In an immediate response, the dollar plunged to lows around 132.70 against the yen despite strong gains in equities. Although yields edged higher later in the session, dollar selling continued towards the European close with a slide to near 132.00 against the Japanese currency.
Chicago Fed President Evans welcomed the latest data, but added that he still expected interest rates to increase this year and in 2023 with an expected peak in rates of 3.75-4.00%. Minneapolis head Kashkari stated that the data had not changed his outlook and it was not realistic to expect a cut in interest rates early next year.
The rhetoric helped pull yields from post-CPI lows with the dollar rebounding to around 132.90.
San Francisco Fed President Daly stated that inflation was still far too high, but also commented that her baseline scenario is for a 50 basis-point hike in September.
There were some fresh geo-political concerns on Thursday with reports that President Biden would decide against cutting tariffs on Chinese imports due to the Taiwan situation. There were also renewed reservations over Chinese coronavirus trends amid fresh lockdowns in several cities. Overall risk appetite held relatively steady, however, with limited net gains in equities and the dollar traded just above the 133.00 level in early Europe with the Euro below 137.00.
Sterling was held in relatively narrow ranges ahead of the US inflation data with a tentative net advance to above 1.2100 against the dollar. There were further important reservations surrounding the UK outlook as the political and economic debate surrounding a surge in energy prices continued to intensify.
Sterling posted strong gains after the US prices data with the impact of a weaker dollar amplified by much stronger risk conditions. Immediately after the release, the UK currency jumped to highs at 1.2250 against the US currency and maintained a strong tone into the European close as risk appetite maintained a very strong tone.
Sterling peaked around 1.2275 before a retreat to around 1.2210 amid a dollar recovery while the Euro retreated to around 0.8430.
The UK Rightmove housing data was slightly stronger than expected, but global developments dominated with Sterling just below the 1.2200 level on Thursday.
The Swiss franc was resilient on Wednesday and resisted significant losses despite a strong improvement in risk appetite following the US inflation data. The Euro was unable to make any headway even with equity markets posting strong gains while the dollar posted heavy losses to trade below the 0.9400 level as US yields declined.
There were further expectations that long-term inflation differentials would support the Swiss currency while confidence in the Euro-Zone remained weak.
The franc maintained a firm tone on Thursday with the Euro drifting towards 0.9700 while the dollar traded around 0.9440.