US Open Note – Stocks dip from record highs and dollar soars after CPI beat

Markets digest key US inflation data

Market composure and the subdued volatility in the forex arena quickly faded as today’s US CPI data beat expectations. US major indices dived from their tops as much stronger inflation figures jolted markets, causing jitters in the currency markets as well, shaping into dollar-driven volatility throughout the forex arena.

It will be interesting to see the rhetoric in Fed Chairman Jerome Powell’s testimony in the coming days relating to the recovery, price pressures and the timing of probable tapering of stimulus as well as rate hikes, given the surprise upset of today’s inflation data for the US. Markets have clearly got the message but investors will stay vigilant for upcoming clues around any policy shift, which could extend today’s moves into the week.

Despite the booster jab to the greenback after the release of stronger inflation figures, its rule over its peers seems to have been limited to a 40 basis point move. The dollar index has soared to 92.65 but is renewed strength in the dollar sustainable over the next few days given key upcoming calendar events?

The reserve currency continues to receive little aid from the US 10-year yield that is currently at 1.32%. Safe haven demand may have caused the slight uptick in the dollar from its Asian sessions lows, but the huge beat in inflation has fuelled the dollar with new buoyancy. Both the core and headline inflation figures for June delivered a whopping 0.9% adjustment against expectations of 0.4% and 0.5% m/m, respectively. On annual basis, core CPI accelerated from 3.8% to 4.5%, while headline CPI rose to 5.4%, well above forecasts of 4.9%.

The yen is holding up across the forex arena, with the USD/JPY pair steering back down, even after the dollar’s boost from inflation.

The heavy euro and the pound were heading even lower as the greenback’s inflation-jab exacerbated downside pressures. Earlier in line releases of Germany’s and France’s inflation data had little effect on softening the blow from the reserve currency. On the UK’s front, although the economic picture is making headways, coronavirus related delta variant uncertainties could cause setbacks, hampering the pace of its recovery. Concerns remain high especially as a full reopening on July 19 is planned, and a large percentage of people are missing their second shot.

Oil stand-off endures; commodity currencies lag

WTI oil futures are currently at $74.20 per barrel, trying to maintain yesterday’s positive tone. The black liquid looks set to reach the $75.00 per barrel mark, given expectations that global demand will continue to pick up as economies improve and vaccinations continue. The OPEC stalemate in terms of releasing more supply could underpin fuel prices as July production levels set to stay, but setbacks on demand remain linked to rises in infections from the delta variant. USDCAD improved from its Asian sessions lows above the C$1.2500 handle, fuelled by dollar buoyancy.  Gold was largely unchanged trading in the vicinity of the $1,800/oz barrier.

Antipodean currencies remain under pressure with the aussie and the kiwi losing some ground from their Asian highs around the 0.7500 mark and the 0.7000 level respectively. A slight sluggish tone in business confidence down under and prolonged lockdowns in Sydney due to the delta variant may cause further weakness in the currency. The kiwi is likely to make further moves around tomorrow’s RBNZ rate decision.

FOMC Member Bostic is scheduled to speak at 16:00 and at 18:30 GMT, while the US 30-year treasury auction is due at 17:00 GMT.

Australian consumer sentiment will be published at 00:30 GMT, followed by the RBNZ’s rate statement at 02:00 GMT.

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