Written by Convera’s Market Insights team
Milder US CPI after PPI miss?
George Vessey – Lead FX Strategist
Two-year US yields slipped back under 4% and the US dollar dropped for a third successive trading session yesterday after US producer prices came in below expectations (2.4% vs. 2.6% y/y) driven by a large drop in services. While correlations between producer and consumer prices aren’t too strong, PPI is a variable that impacts CPI, and therefore we’re bracing for a potentially softer US CPI print today.
Benign inflation data should be well received by investors as it will validate markets’ expectations for multiple interest rate cuts by the Federal Reserve (Fed) this year. Currently, over 100 basis points of easing is being priced in before year-end, in other words, four quarter points cuts. The Fed funds rate is expected to get to a “neutral” level of 3-3.25% by mid-2025. However, uncertainty surrounding the path for Fed policy rates remains high due to the data dependent stance of the US central bank still. And the data is far from clear cut. As an example, despite the headline PPI figures suggesting a continuation of disinflation, underlying data shows the percentage of sub-components increasing on an annual basis, is back at 80%. Meanwhile, despite the uptick in the NFIB’s Small Business Optimism to the highest level since February 2022, sentiment remains significantly below the 50-year average and the uncertainty index jumped to its highest since November 2020.
What does this all mean for the US dollar? In general, softer inflation prints support the notion of Fed easing and weighs on the dollar’s yield advantage. Hence, a short period of dollar weakness could ensue if data allows. Weak activity data also dents the dollar’s high growth advantage, but too weak, and its safe haven appeal starts kicking in. Either way, we cannot write off the strong dollar regime just yet, especially while structural factors such as tariff risks and increased US fiscal stimulus in the build up to the US election continue to play a supporting role.
Pound drops on soft CPI print
George Vessey – Lead FX Strategist
The highly anticipated UK inflation report was published this morning and the headline rate picked up for the first time in 2024, rising to 2.2% YoY, but below market consensus and BoE’s own forecasts. The core print came in at 3.3% and the BoE’s closely watched services inflation at 5.2%. The probability of a September rate cut remains less than 50%, but the pound has come off 0.2% since the release of the print.
The star performer in the FX space this year has come under pressure over the past month amidst wavering global risk appetite and bets of BoE rate cuts, denting sterling’s appeal. However, yesterday’s unexpected drop in the UK unemployment rate and the fall in wage growth being put down to base effects, supports the notion of the BoE moving slowly on rate cuts. Hence GBP/USD reclaimed $1.28 to close above its 50-day moving average and re-test its 200-week moving average, which has been a critical trading point this year. GBP/EUR also flipped back above its 200-day moving average to recoup the €1.17 handle, having slumped to a 4-month low near €1.16 low just last week.
Today’s figures add to a mixed set of UK economic data that investors are watching for signs of when the BOE might lower borrowing costs again. Traders are betting on at least one more cut this year, but lower price pressures might open the way for more reductions. In addition, the breadth of services components rising vs. falling has further normalised. If the trend continues in August and the BoE’s assumption of sticky services CPI continues to wane, a September cut cannot be ruled out.
Euro shrugs off ZEW miss
Ruta Prieskienyte – Lead FX Strategist
Germany’s ZEW Economic Sentiment report for August plummeted to its lowest level since January, extending a disappointing run of domestic data and recent turmoil in global stock markets. The expectations gauge fell sharply to 19.2 from 41.8 in July, significantly below the market consensus of 34. An index of current conditions also declined more than expected. Economic expectations are likely still being influenced by high levels of uncertainty, driven by ambiguous monetary policy, disappointing business data from the U.S. economy, and growing concerns over an escalation of conflict in the Middle East.
Germany is facing the prospect of minimal economic expansion this year, which is weighing down Eurozone economic momentum. Despite this, markets have yet again shrugged off the stark warning. ECB rate-cut wagers remain broadly steady, with pricing indicating a 25 basis points easing in September and 70 basis points by year-end. Instead, investors continue to focus almost exclusively on US-centric developments. Indeed, the euro climbed towards $1.10, approaching January’s levels, after soft U.S. wholesale inflation data bolstered investor confidence that the Federal Reserve may soon begin cutting interest rates.
Markets are stabilising, but implied volatility still indicates lingering uneasiness leading up to the U.S. CPI release. Overnight EUR/USD implied volatility has surged to 9.6%, nearly twice the year-to-date average. After the weak NFPs report, markets have become more jittery around data releases.
USD/CAD retreats to a near 4-week low
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: August 12-16
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
