CPI uplift short lived
The US dollar was initially sharply lower overnight after the US’s July inflation reading came in below expectations, but rising bond yields continue to spook markets, and the greenback later rallied.
Headline inflation was actually higher last month – up from 3.0% in June to 3.2% in July due to an increase in energy prices – but still came in below expectations for 3.3%.
But it was the core numbers that sparked hope the Federal Reserve has contained inflation. Core inflation in annual terms fell from 4.9% in June to 4.7% – below forecasts for 4.8% – while “super core” which removes shelter fell to 2.6%.
The news hit market pricing for the Federal Reserve with markets now seeing only an 11% chance of a 25-basis point hike when the US central bank meets in September (source: Refinitiv).
US Treasury auctions force yields higher
The positive reaction in markets from the inflation data was only short-lived, however.
After climbing more than 1.3% on the news, the US’s S&P 500 closed virtually flat. The Nasdaq gained 0.2%.
US bond yields were again the driver of market weakness with the US ten-year bond yield jumping from 3.95% to 4.10% yesterday. A poorly received 30-year bond auction from the US Treasury (yielding 4.19%, the highest since 2011) drove bond yields higher.
The US Treasury has launched more than USD100b in bond auctions this week in a move that has seen supply overwhelm demand.
These higher yields, and associated risk-off sentiment, boosted the US dollar.
The AUD/USD fell 0.2% while NZD/USD fell 0.4%. USD/CNY climbed 0.2%.
Kiwi at lows ahead of RBNZ next week
UK data is the highlight today with June GDP numbers and a range of other figures released at 4.00pm AEST.
Later tonight, US producer prices are due.
Into next week, the focus moves to New Zealand, with the Reserve Bank of New Zealand decision due. The kiwi has been particularly pressured by rising US bond yields over the last four weeks and further evidence that the RBNZ is at the end of its tightening cycle at next Wednesday’s decision might drive the NZD/USD below key support near 0.6000.
Greenback stays strong despite lower CPI
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 7 – 11 August
All times AEST
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