Dollar on the front foot this morning
June proved to be a positive month for the dollar which chalked up solid gains, including a 2.5 cents (or 2%) advance against the euro, propelled higher by a “hawkish” turn by the Fed during the course of the month. Some solid economic data and higher US bond yields are helping to underpin the US currency at the start of July. EURUSD and GBPUSD are trading at around $1.14 and $1.3230 this morning, retreating from yesterday’s best levels of circa $1.1440 and $1.3280 respectively. EURGBP continues to hover just north of £0.86. Today sees the release of a ‘flash’ reading for Euro area inflation in June. Headline inflation is expected to have dipped last month (to 3%) having risen in each of the previous three months in response to the energy price shock. A softer than expected inflation outturn could put some further downside pressure on the single currency. Fed Chair Warsh is due to appear at the ECB’s central banking forum in Sintra, so his remarks will command some attention.
A firming of Fed rate hike expectations, partly in response to better than expected US labour market-related data, contributed to a notable rise in US bond yields, which increased by around 8-9bps across the curve. German yields, in contrast, were flat to slightly lower, in response to softer than expected German inflation data, while UK yields were 3-5bps higher on the day. In equity markets, the Nasdaq in the US continued its recovery from last week’s decline, gaining a further 1.5% or so, while European indices closed around 1% to 1.5% higher.
Headline HICP inflation in Germany fell for a second month running in June according to the flash estimate, coming in at 2.4% after 2.7% in May, largely due to a further easing in energy price inflation. The outturn for Germany, together with available readings for France, Italy, Spain and Ireland, point to a fall in Euro area headline inflation last month. It is likely that core inflation (excluding energy and food prices) also nudged down in June (from May’s 2.6%).
Fed member Hammack says “we’ve got inflation that’s too high, and it’s been too high for the past five years,” adding that “if that continues, we may need higher interest rates to bring inflation
back down to (the 2%) target.”
Looking to the day ahead, as well as Euro area inflation, other economic data due include the ISM manufacturing index and ADP employment report (both for June) in the US and final PMI manufacturing readings for June in the main economies. As mentioned, the ECB’s central banking forum continues in Sintra.