Dollar firmer after US inflation data

Yesterday’s US inflation data, which showed evidence of a pass-through of higher tariffs to consumer prices, contributed to a paring back of Fed rate cut expectations, an increase in US bond yields and a strengthening of the dollar. UK inflation data released just a short while ago were firmer than expected which is providing some very mild support to sterling. The euro is trading at around $1.1620 against the dollar this morning, down from just under $1.17 yesterday morning albeit off yesterday’s low of just under $1.16. The pound has dipped to $1.34 against the US currency, off yesterday’s low of $1.3380, and is slightly firmer against the euro trading at about £0.8670 this morning.

The market has scaled back further expectations for Fed rate cuts following the latest inflation data, with just about 40bps of easing now priced in for the balance of this year. This contributed to a rise in US yields yesterday, with 2-, 10- and 30-year yields finishing about 4-5bps higher (with 30-year yields breaching the 5% level again). Elsewhere, German yields were flat to marginally lower while UK yields ended slightly higher, with the latter nudging up again this morning following the (UK) inflation data. Higher bond yields weighed on US equity markets, which closed lower on the day, as did European stocks.

Headline CPI inflation in the US picked up to 2.7% in June (slightly ahead of forecast) from 2.4% in May. This was mainly due to higher energy and food price inflation, though core inflation (excluding energy and food) ticked up to 2.9% from 2.8%. The increase in core inflation was due to higher goods inflation, which rose for a third month in a row to 0.7% (from 0.4% in May and 0% back in March) reflecting the impact of  tariffs, while core services inflation was unchanged at 3.6%.

Regarding the latest UK CPI numbers, headline and core inflation rose in June, to 3.6% and 3.7% respectively from 3.4% and 3.5% in May. Both energy and food price inflation picked up last month, as did core goods inflation, though core services inflation (which the Bank of England watches particularly closely) was unchanged (at 4.7%). Attention now turns to tomorrow’s labour market report.

For the day ahead, economic data due include producer prices and industrial production in the US, while the Fed publishes its latest Beige Book. There are also a number of Fed members scheduled to speak over the course of the day.