Daily Market Pulse
Dollar Sinks as US CPI Falls to Two-Year Low
6 minute readUSD
The Dollar is on the decline this morning, sinking toward a three-week low after the release of US inflation data all but assured markets the Fed is likely to stand pat tomorrow.
US CPI dropped to 4.0% in May, the lowest since March 2021, driven by a decrease in energy prices, while the core rate slowed to 5.3%, the lowest since November 2021. Meanwhile, the annual core sank to an 18-month low of 5.3%.
Up next, the Fed is set to deliver its decision on interest rates tomorrow, with markets pricing in a 95% chance of a hold. Although the decision appears set in stone, markets will be keen to see the Fed's revised economic projections, including their growth forecasts, inflation, and interest rates for the next two years.
EUR
The Euro is up over 0.5% this morning as traders digest new US and European inflation numbers.
Germany's annual inflation rate in May reached a 14-month low of 6.1%, down from the previous read of 7.2%. While energy inflation significantly decreased, food prices rose at a slower pace and services inflation slowed slightly.
Meanwhile, Spain's CPI in May fell to its lowest level since July 2021, confirming a decrease to 3.2% from April's 4.1%. The decline was driven by falling prices in transportation, fuels, housing, and utilities and a slowdown in food, beverage, and hospitality prices. In addition, the annual core inflation also decreased to a near two-year low of 6.1%.
GBP
The Pound is surging higher this morning, up over 0.7%, as markets react to better-than-expected UK jobs data and the US inflation release.
The UK's unemployment rate slightly increased to 3.8% from February to April, with the number of unemployed rising and reaching 1.31M. However, employment levels surged by 250K, reaching an all-time high of 33.09M, driven by increases in employees and self-employed workers.
Additionally, average weekly earnings, including bonuses, rose 6.5% year-on-year, surpassing expectations, while regular pay increased by 7.2%, the highest growth rate since June 2021. However, despite the positive wage growth, when adjusted for inflation, total pay fell by 2% and regular pay dropped by 1.3%.
JPY
The Yen is back in the green this morning, benefiting from the broad Dollar selloff post-CPI as USD/JPY traders now look to position themselves ahead of the Fed and BoJ decisions over the coming days.
Overnight, Japan's Q2 business survey index of large manufacturing firms increased to -0.4%, indicating improved business conditions but remaining in negative territory for the third consecutive quarter. Import costs, raw materials prices, and global economic uncertainties continued to impact business sentiment. However, there is optimism as firms expect further improvement in Q3 and Q4.
In addition, Japanese equities surged on Tuesday, with the Nikkei 225 and Topix indices reaching their highest levels since 1990, driven by the positive business outlook for the rest of 2023 and the likelihood of the Fed standing pat tomorrow.
CAD
The Loonie is up around 0.2% this morning after beginning the week on the back foot on the heels of yesterday's selloff in oil prices. The Loonie is pacing to retest the April low as traders shift out of the Greenback after this morning's soft US inflation print.
After Brent and WTI both dropped over 4% yesterday, buyers have stepped in today to cut into some of those losses this morning after the release of OPEC's latest monthly report.
According to the report, OPEC expects global oil demand to increase by 2.35M barrels per day in 2023, remaining unchanged from the previous forecast. However, the group acknowledges that uncertainties persist due to high inflation, rising interest rates, and geopolitical issues.
MXN
After reaching its highest level since April 2016 yesterday, the Mexican Peso is inching higher today after the release of US CPI data. MXN traders now await news from the Fed tomorrow for indications on the path of US interest rates over the next two years.
With Banxico committing to keeping rates in place for the foreseeable future, the question USD/MXN traders will be most keen to answer is who will cut rates first and when? The likelihood of a Fed cut in 2023 has fallen over the last few weeks, so traders will look to the Fed's revised dot plot tomorrow to recalibrate those expectations and determine how much steam the Peso rally may have left.
BRL
The Brazilian Real is up around 0.2% this morning after picking up 0.3% against the Dollar yesterday. The moves come after the news of Brazilian economists lowering their long-term inflation expectations after standing pat for months.
Projections for 2025 inflation have been reduced to 3.9%, down from the previous estimate of 4.0%, signaling a more favorable economic environment. However, the current inflation expectations remain above the targets set by the central bank for this year and the following years.
BRL traders now look toward tomorrow's retail sales release, expected to show 0.3% growth month-on-month in April, cooling from the 0.8% rise seen in March.
CNY
After weeks of speculation, the PBoC finally delivered the stimulus markets were clamoring for, unexpectedly cutting its short-term lending rate by 0.1%. The move has put more pressure on the struggling Yuan, as markets expect similar cuts to the medium-term lending facility and the benchmark loan prime rates.
Tomorrow's Fed projections become all the more critical for the Yuan, as traders will look to the revised dot plot to indicate how wide the interest rate spread between the two nations could get and for how long.
Meanwhile, overnight data indicates new loans from China's banks fell short of market expectations in May, providing further evidence of a struggling domestic economy.
