Ahead of an inflation data release yesterday afternoon, the trade-weighted Dollar index stood at year-to-date highs. Positive US headlines and developments within the US Federal Reserve over the past two weeks had helped USD secure further gains on its major crosses. The inflation data released yesterday afternoon was expected to show an increase in the general price level of 0.4% between June and July, an annualised rate, when taking into account seasonality and compound effects, equal to a whopping 4.8%. The data ultimately came in at a month-on-month figure of 0.3%, slightly below expectations, but this was sufficiently strong to realise a comparable annualised inflation figure just shy of 5%. The immediate move in US treasury yields was negative with demand behind USD falling, allowing the currency to bounce off of its recent highs.
The rationale behind the market’s decision to sell USD in the face of the inflation data is unveiled when you considered its mediocrity. The data came out almost bang in line with expectations showing a moderation of June’s inflation growth rate. This falls in line with the Fed’s current narrative of significant yet transitory inflation. Given that recently the market has been pricing its interest rate expectations ahead of the Fed, expecting inflation (and thus eventual interest) rates to rise somewhat more sharply and sustainably, the data forced a correction in some existing positions.
Ultimately, the immediate reaction in USD was 0.5% to the downside. This move has persevered into today’s trading session. The reading provided evidence of significant inflation, yet did not portray a price change significant enough to force the Fed to change its tone. Instead therefore, the above target annualised inflation is likely to serve to only reduce real yields within US cash further, drawing demand from the Dollar. In absolute terms, these levels provide challenges to the sustainability of the USD. Whilst the debate surrounding the globalisation of the US Dollar and its status as a reserve currency has been somewhat silenced as a result of the distraction of the pandemic, current annualised inflation rates could feed into USD dynamics globally. At this rate of inflation, the value of money in the United States will halve in less than 15 years. From this perspective it is easy to see why inflation landing in line with forecasts could undermine rather than stabilise the Dollar.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
A weaker Dollar: Trump vs. Powell The Dollar continued to lose ground yesterday as the truce between Israel and Iran appeared to continue to hold. There has been a noticeable return to focus upon macro and monetary influences in major currency pairs. Yesterday, Fed Chair Jay Powell provided his semi-annual monetary policy report before the […]
Next level EURUSD has managed a relatively smooth ascent to its current levels, around 1.18. That is despite significant resistance levels, most notably around 1.17. A large collection of option strike prices gathered around this key level and the price history of the pair shows us its significance. Sustained closes above this level since last […]
Whiplash A highly volatile start to yesterday’s trading session saw a flight to safety in markets. Despite the Dollar having lost much of its appeal as a safe haven lately, there was still an identifiable USD bid prior to and during the European open. We have identified recently how markets have clearly differentiated between general […]