Dollar loses ground after US data
Softer than expected US producer prices data yesterday saw bond yields fall, stocks rally and the dollar weaken, with EURUSD and GBPUSD getting up to highs of $1.10 and $1.2870 respectively. The euro remains at around $1.10 this morning but sterling has retreated to about $1.2840 following weaker than expected UK inflation data released earlier, with the pound also a touch weaker vis-à-vis the euro at about 85.7p. Today’s US CPI inflation data are now key – a softer than expected report and the dollar is likely to extend its decline, while stronger than expected readings should see it regain some ground.
US government bonds led a decline in yields post the producer prices data as Fed rate cut expectations firmed, with 2- and 10-year yields closing down around 7bps and 5bps respectively. In equity markets, the Nasdaq led a rally in US stocks, gaining almost 2.5% to within a whisker of its level just before the recent bout of turbulence in financial markets, while European stocks added around 0.5%.
Upstream inflation pressures in the US were subdued in July. Producer output prices rose by just 0.1% last month (versus +0.2% expected) following an increase of 0.2% in June, while the annual rate of increase slowed sharply to 2.2% from 2.7% the previous month
The headline rate of inflation in the UK edged up to 2.2% in July (below the consensus forecast of 2.3%) from 2.0% in June, according to this morning’s CPI report, but core inflation eased to 3.3% (from 3.5%) driven by a larger than expected decline in services inflation to 5.2% (from 5.7%). The Bank of England is closely monitoring services inflation as an indicator of inflation persistence in the economy and so will be reassured by the latest reading.
Today’s CPI data in the US are expected to show headline and core consumer prices both rose by 0.2% in July. This would leave the annual rate of headline inflation unchanged from June at 3%, but would see the core rate edge down to 3.2% from 3.3%. Other data due today include of Q2 GDP (second estimate), employment and industrial production in the Euro area