Dollar loses ground follow soft US inflation print and more tariff threats

The euro rose to close to $1.15 to the dollar yesterday and broke through that level overnight after yet more tariff threats from Donald Trump, and is up about a cent from where it was yesterday morning. The greenback lost ground to all major currencies following weaker than expected US inflation data for May which also had markets increase the chance of Fed rate cuts. Overnight, President Trump told reporters the US would send out ‘take it or leave it’ letters in the next few weeks to trading partners setting out unilateral tariffs. The dollar initially had some support earlier yesterday from news of a US-China trade deal but the details of this deal (with a 55% tariff on China remaining) proved to be less encouraging and Trump’s comments further undermined the dollar. The euro is trading at $1.1520 this morning and 84.9p to sterling. Sterling is a little on the backfoot against the euro following a weak monthly UK GDP print this morning but has gained on the dollar and is trading at $1.3560.

The market is increasing the chances of the Fed bringing forward rates cuts into this year, the market is now pricing in a 75% chance of a 25bps cut by the September FOMC meeting and two 25bps cuts are nearly fully priced by year-end. Inflation data was slightly weaker then expected and the US labour market is also showing some signs of softening so the market is speculating that these two events in tandem will spur the Fed to act faster. US bond yields fell with 10-year yields down 6bps to 4.4%. European bond yields saw small rises with German 10-year bund yields up 1bps to 2.53%. The US-China trade deal saw US equities gain initially but those gains and more were lost over the course of the session with the S&P 500 down 0.3% for the day.

Core US CPI inflation rose just 0.1% in May – against an expectation of a 0.3% gain – leaving the annual core rate unchanged at 2.8%. US core inflation has come in a bit lower than expectations for a number of months, suggesting perhaps that retailers have yet to pass on tariff impacts – perhaps from running down inventory imported pre-tariffs. The huge uncertainty about what final US trade policy will be may also be causing businesses to delay passing on price increases until there is more certainty. However, running down stocks and holding off on decisions can only work for so long, an ultimately tariffs will prove inflationary.

The US and China agreed a trade deal after extensive talks in London. The deal now goes to their respective leaders to sign off. The details from the deal are unclear but China is to resume shipments of rare earth minerals to US companies while the US will ease export controls on some technology. It’s also unclear if there will be further efforts to reduce tariffs which President Trump suggested will be 55% for Chinese imports (and 10% from China on US imports) as there is little in the agreement, as announced, that will improve trade between the two countries for the vast majority of goods. Overnight, President Trump ratcheted up trade tensions yet again saying the US will set unilateral tariffs for countries (again) by sending them letters outlining tariffs in the next one to two weeks ahead of the July 9th deadline to reimposes his initial ‘liberation day’ tariffs set in April.

UK GDP fell by 0.3% in April, leaving the three month over three month rate unchanged at 0.7%. This is the first contraction in a single month for six months. The weakness was across the board with services sector and manufacturing sector output contracting, although construction made gains last month. Exports to the US dipped after gains in previous months as exporters rushed to get ahead of tariffs. There was a number of tax and energy bill increases that came into effect in April which appear to have caused consumers and business to hold back on spending. The UK is also dealing with a softening labour market which is likely impacting sentiment. Separately, data showed the UK housing market is slowing with the RICS house price balance falling to -8 in May from -3 in April indicating a greater number of estate agents were reporting a fall in prices rather than a rise last month.

Looking to the day ahead, we get US PPI and initial jobless claims while there is a number of ECB speakers due.