Dollar strides into the main event

The dollar gave back just a sliver of break-out gains after inflation figures matched expectations.

Summary

The dollar gave back just a sliver of break-out gains after inflation figures matched expectations.

Dollar shrugs off in-line inflation

With much of the small cooldown in the pace of U.S. consumer price rises in May due to falling energy costs, the dollar’s broad rebound ahead of the week’s major macroeconomic events remains intact. Simmering equity volatility came off the boil though. It was a relief reaction from investors positioning for the Fed to plant a clearer flag around the chances of one more hike than is currently priced. European shares also switched back to gains after the more benign than feared inflation outcome. CBO’s VIX volatility index drifted off course once again, having headed higher on Monday. In some ways, as-expected U.S. CPI has delayed a real test of the resilient risk-seeking sentiment that broke out at the start of the week. Bearing in mind the dramatic return to more normal volatility trends earlier in the year, trading could still be choppy as we wait for the Fed. Pared inflation protected Treasurys gains and the 10-year benchmark ticking away from 3% show expectations are falling –  but not much. The 10-year yield was just 2.45 of a basis point from the market-sensitive 3% and on course for a two-session rise. In turn, advancing yields kept the dollar against the yen firmly on the 110 handle, despite an anti-climactic start.

Historic and neutral

The long-term importance of the Korea-U.S. summit is obvious but the event itself was always going to be something of a sideshow. All eyes were on the topic of denuclearisation, and, just as importantly facilities to verify that, but whilst North Korea’s Kim Jung Un reaffirmed “unwavering” commitment to the aim, agreements appeared vague and their scope limited. Verification was discussed, according to U.S. President Donald Trump, in a lengthy post-summit presser, but he gave no indication of whether North Korea was inclined to move towards the kind of stringent corroboration needed. So, grounds for optimism on a new North-South Korea order remain, but talks have merely confirmed there’s a long grind ahead to fulfil that promise. Markets have more pressing concerns.

Pound hinges on “Meaningful”

Having evaded pressure from slightly disappointing wage data, sterling was beginning to crack. A severely battered rising trend line has now been destroyed despite the pound having tacked on almost 80 pips from lows. The bulk of the pound’s event risk for the week remains ahead, including a parliamentary vote on PM Theresa May’s dreaded “meaningful” Brexit Bill amendments, Wednesday’s UK CPI and the ECB meeting. Anything, in fact, with a potential advantage for the other side of the pair. With three new spike lows since cable’s $1.3471 high on 7th June, a return to the $1.33 handle now has an air of inevitability. The euro’s own upswing from end-May 10-month lows is at stake too, but the single currency is faring better. ECB forward guidance on QE exit timing looks increasingly priced now, suggesting further substantive gains this week will require deeper sterling and yen weakness. $1.178 is still the key sticking point for a continuation of the up leg since $1.15 on 29th May. The high since then at $1.1840 is fading into distant memory, in FX market terms.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.