Dollar strides into the main event

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


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.

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