Dollar lower post US inflation data

The dollar is weaker after yesterday’s US inflation data came in softer than forecast, which boosted expectations for Fed rate cuts. It fell sharply immediately following the data, trading down to intra-day lows of $1.09 against the euro and $1.2950 against sterling. It has regained some ground since but remains lower overall, trading at around $1.0870 and $1.2915 respectively this morning. EURGBP has edged down to around £0.8415 and looks like it might test its year to date low of just under £0.84 in mid-June.

The market now sees a circa 90% chance of the Fed cutting interest rates by a quarter-point at its next but one meeting in September, and is pricing in 56bps worth of cuts in total by the end of the year. This has contributed to a decline in US government bond yields, with 2-and 10-year yields ending around 10bps lower yesterday. Surprisingly though, US equities were little changed with the S&P 500 closing marginally lower on the day.

The US CPI data showed headline consumer prices fell by 0.1% in June, while core consumer prices (i.e. excluding energy and food prices), rose by just 0.1%, the smallest monthly increase by some distance so far this year. This took the annual headline and core inflation rates to 3% and 3.3% respectively, down from 3.3% and 3.4% in May.

This latest set of data will add to the Fed’s confidence that inflation is returning sustainably to target and so bolsters the case for a cut in interest rates. Indeed, Fed member Daly said post the release of the data that, “with the information we have received to date, which includes data on inflation, employment, GDP growth and the outlook for the economy, it’s likely that some (monetary) policy adjustment will be warranted.”

We get more US inflation data today, with producer prices (PPI) and the University of Michigan’s survey of consumer inflation expectations/consumer confidence both scheduled for release.