Dollar slightly firmer

Yesterday’s inflation data in the US were relatively benign and in line with the consensus forecast, prompting a modest paring back of Fed rate expectations with the chances of a hike at next month’s meeting now seen at around 35% (from circa 50/50 before the data). The dollar weakened initially after the release of the data but has more than recovered ground since. This sees the euro and sterling trading at around $1.1520 and $1.3485 respectively this morning, down from yesterday’s best levels of about $1.1565 and $1.3545. EURGBP continues to trade in a very tight range, still hovering just below £0.8550. UK GDP data for Q2 published a short while ago were in line with expectations and have had little impact on the pound.

The inflation data had little impact on US bonds with 2-year yields ending marginally lower and 10-year yields largely unchanged, while equivalent German and UK yields were broadly flat. It was something of a mixed session for equity markets, albeit the price action was fairly limited overall, with the S&P 500 in the US chalking up modest gains but European stocks ending slightly lower on the day.

Headline and core consumer prices in the US rose by 0.1% and 0.2% month-on-month in July according to yesterday’s CPI report, leaving the respective annual rates of inflation at 3.4% and 2.5%, down from 3.5% and 2.6% in June. Within core inflation, goods inflation was unchanged at 0.8% but, notably, services inflation fell for a second consecutive month to 3% (from 3.2% in June and 3.4% in May).

GDP in the UK rose by 0.4% quarter-on-quarter and by 1.2% year-on-year in Q2, having expanded by 0.6% q-o-q and 0.9% y-o-y in the first quarter of the year, with consumer spending (+0.3%) and business investment (+1.7%) both increasing in the quarter. Q2 also ended on a solid note with GDP up 0.3% in June (versus May).

For the day ahead, there is more inflation data due in the US, this time producer prices (PPI) for July, while other US data scheduled include the regular weekly jobless claims. Elsewhere, industrial production (June) is due in the Euro area.