USD: Dollar losing rate support after inflation prints
The US dollar softened after a second consecutive downside inflation surprise reinforced the disinflationary signal from Tuesday’s CPI report and further reduced expectations of near-term Fed tightening. June PPI unexpectedly fell 0.3% m/m, while the annual rate slowed to 5.5% from 6.0%, adding to evidence that price pressures are easing and prompting markets to fully price out a July hike.
With both CPI and PPI now undershooting expectations, the focus has shifted from whether the Fed hikes again to how long policymakers remain on hold before cutting. True, OIS pricing is still pricing a hike by year-end, but even that looks increasingly vulnerable if incoming data continues to soften. Attention now turns to US retail sales data today, where World Cup-related spending could provide an upside surprise and a timely reminder that consumer demand remains firm.
Still, for now, the decline in front-end Treasury yields weigh on the dollar, particularly as yield differentials have moved against the US currency. Notably, the dollar is drawing less support from the recent escalation in geopolitical tensions than would typically be expected. While oil prices remain elevated, the traditional positive correlation between crude and the dollar appears to be weakening, with markets instead focusing on the implications of softer US inflation and lower Fed rate expectations.
This comes at a time when yields in parts of Europe and APAC continue to edge higher as a result of higher energy prices, further eroding the US rate advantage that had been one of the dollar’s key pillars of support over the last couple of months.
Overall, while resilient labour market conditions and lingering inflation risks should prevent markets from aggressively pricing Fed easing, the near-term narrative has shifted modestly against the dollar, with softer yields and compressed rate differentials likely to cap upside unless geopolitical risks trigger a broader flight-to-safety bid.
EUR: Euro’s rates support meets energy resistance
The euro remains relatively well supported against the dollar, with EUR/USD holding above 1.14 as softer US inflation data continues to weigh on the greenback. Yesterday’s benign PPI release reinforced the message from this week’s CPI report that US price pressures may be moderating, prompting markets to further trim Fed tightening expectations. As a result, short-term rate differentials have moved in a manner that’s modestly supportive of the euro and other major currencies against the dollar.
However, unlike many of its peers, the euro faces a significant headwind from energy markets. Were it not for the renewed tensions in the Gulf and the associated surge in oil and gas prices, the recent shift in US rate expectations would likely provide a clearer path higher for EUR/USD. Instead, rising energy costs are once again complicating the outlook for the eurozone economy and limiting the euro’s ability to fully capitalise on broader dollar weakness.
From a technical perspective, EUR/USD appears to be encountering resistance in the 1.1460–1.1470 area, while demand remains evident below 1.14. That suggests the pair is likely to remain range-bound for now.
The broader story remains unchanged: falling US inflation is keeping the dollar on the defensive, but rising energy prices are preventing the euro from fully taking advantage.
GBP: GBP/USD at two-month highs, highest against JPY since 2008
GBP/USD pierced through the 1.34s yesterday, closing at 1.3540, its highest level in two months. The move was aided by a softer-than-expected US PPI print, which reinforced the recent trend of benign US inflation surprises and weighed on the dollar. Technically, cable also pushed through a cluster of key moving averages around 1.34, helping to reinforce bullish momentum.
The pound’s strength was not confined to the dollar pair. GBP/JPY climbed to its highest level since 2008, while sterling also reached an eleven-month high against the Swiss franc. More broadly, GBP enjoyed a constructive session across most major crosses.
Reports that Home Secretary Shabana Mahmood is set to become Chancellor were well received by markets, largely because they reinforce the perception of a smooth and orderly transition rather than because of the appointment itself. There may also be an element of relief, with Mahmood viewed as a more market-friendly option than Ed Miliband, whose fiscally expansionary reputation had raised some investor concerns.
For now, markets appear comfortable looking through political uncertainty. While significant questions remain around the policy agenda and makeup of a future administration, the lack of clarity is making it difficult for investors to attach a meaningful political risk premium to sterling.
Options markets reinforce this view. EUR/GBP volatility, arguably the cleanest expression of UK-specific political risk, remains subdued across most tenors, suggesting little appetite to price significant political disruption. One exception is a modest uptick in one-week implied volatility, which now captures the upcoming 22 June inflation release.
June inflation prints in both the US and Eurozone have undershot expectations, challenging what had been a broadly hawkish market narrative driven by war-driven price pressures, and weighing on the dollar and the euro. Markets are focused on whether the UK will follow suit.
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Calendar: July 13-17
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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.
