Dollar in consolidation mode
The dollar is currently in consolidation mode following its sizeable gains over the past week or so. Yesterday’s inflation data in the US were broadly in line with expectations, prompting some further easing of Fed rate hike expectations and a further modest decline in US bond yields. Asian equity markets were on the back foot overnight, which will have a knock-on effect on European stocks at the open today. EURUSD and GBPUSD are trading at around $1.1380 and $1.32 respectively this morning, both a touch firmer relative to yesterday morning’s levels. EURGBP is marginally softer but continues to hold above the £0.86 level (at £0.8620).
US 2-year bond yields edged lower for a third consecutive session, falling by around 3bps, reversing some more of the sharp spike in yields that followed last week’s Fed meeting, while 10-year yields were broadly flat. Elsewhere, German and UK yields both ended largely unchanged on the day. Yields generally are edging down this morning on the back of weakness in equity markets. South Korea’s KOSPI index led a decline in Asian stocks overnight shedding almost 6%, while Japan’s Nikkei index was off more than 4%.
Yesterday’s inflation data in the US were broadly in line with expectations. The annual rate of headline PCE inflation – the Fed’s target measure – accelerated further to 4.1% in May, more than double the 2% target, while core PCE inflation (which excludes energy and food prices) nudged up to 3.4%. Within core, goods inflation fell to 2.4% – perhaps indicating that the tariff-related increase in prices is now waning – but this was more than offset by a further rise in services inflation to 3.7%.
Fed member Williams says “inflation is unquestionably elevated and well above (the Fed’s) longer-run goal of 2 percent.” He still believes though that “the current stance of monetary policy is well positioned” to return inflation to target, but acknowledges that there are “substantial” upside risks to the outlook for inflation. Market expectations for Fed hikes have eased over the past few days, with about 32bps now priced in by year-end, down from around 40 bps at the start of the week.
It’s a quiet end to the week in terms of economic data. The ECB publishes its latest (May) survey of consumer inflation expectations, which should command some attention, while the trade balance (May) and a final reading for consumer confidence (June) are due in the US.