FX Update: Scorching US CPI print puts Powell in the hot seat
Summary: The US June CPI report came in far hotter than expected at both the core and headline, setting a new high bar for the cycle. While some will point to the especially large contribution from the used cars and trucks category to the higher than expected reading, a number of other categories have shown strong rises in recent months and the Fed is at risk of having to make a course correction the market is far from prepared to absorb.
FX Trading focus: Hot US CPI data prompts fears of Fed course correction
US June CPI facts: headline was +0.9% MoM and +5.4% YoY vs. +0.5%/+4.9% expected and vs. +5.0% YoY in May. The Ex Food and Energy CPI was +0.9% MoM and +4.5% YoY vs. +0.4%/+4.0% expected and vs. +3.8% YoY in May.
A short update today as the heat in today’s US June CPI report requires at least a brief comment – see the full table of the numbers in the official BLS report below. The bottom line: this number is too hot to ignore and the market is right in reacting quite strongly to it, as it strongly raises the risk that the Fed will need to move soon to get ahead of fears that this inflationary spike will prove far larger than previously anticipated, and may not be as transitory as the recent “Goldilocks” backdrop of lower long US yields and forever higher risk asset prices suggested.
In reaction to the data, the EuroDollar short-term interest rate futures are pulling back forward the anticipated first Fed rate hike, though in the case of the December 2022 EuroDollar contract, to take an example, we are still about four ticks/basis points away from the lows posted not long after the June 16 FOMC meeting that sparked the recent US dollar rally. The greenback itself is rising sharply and EURUSD is close to touching the recent lows below 1.1800, while AUDUSD is in a similar spot, with its recent lows near the pivotal 0.7400 area, while the next keys for EURUSD are perhaps 1.1775 and then the 1.1704 low from March 31.
This data not only generally sets the market a bit more on edge, but increases focus on everything inflation related from here, including incoming data like the inflation expectations in the July flash University of Michigan sentiment survey release on Friday, but also anything anecdotal in the Fed Beige Book out tomorrow evening. It also puts Powell in the hot seat in testimony before Congressional panels tomorrow and Thursday, but also in general heading into the FOMC meeting the week after next as data like this raises the risk that the Fed will have to make an embarrassing retreat from its complacent stance on inflation and have to reach out soon to taper MBS purchases and perhaps even US Treasury purchases sooner rather than later.
John Hardy
Head of FX Strategy
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FX Trading focus: Hot US CPI data prompts fears of Fed course correction
US June CPI facts: headline was +0.9% MoM and +5.4% YoY vs. +0.5%/+4.9% expected and vs. +5.0% YoY in May. The Ex Food and Energy CPI was +0.9% MoM and +4.5% YoY vs. +0.4%/+4.0% expected and vs. +3.8% YoY in May.
A short update today as the heat in today’s US June CPI report requires at least a brief comment – see the full table of the numbers in the official BLS report below. The bottom line: this number is too hot to ignore and the market is right in reacting quite strongly to it, as it strongly raises the risk that the Fed will need to move soon to get ahead of fears that this inflationary spike will prove far larger than previously anticipated, and may not be as transitory as the recent “Goldilocks” backdrop of lower long US yields and forever higher risk asset prices suggested.
In reaction to the data, the EuroDollar short-term interest rate futures are pulling back forward the anticipated first Fed rate hike, though in the case of the December 2022 EuroDollar contract, to take an example, we are still about four ticks/basis points away from the lows posted not long after the June 16 FOMC meeting that sparked the recent US dollar rally. The greenback itself is rising sharply and EURUSD is close to touching the recent lows below 1.1800, while AUDUSD is in a similar spot, with its recent lows near the pivotal 0.7400 area, while the next keys for EURUSD are perhaps 1.1775 and then the 1.1704 low from March 31.
This data not only generally sets the market a bit more on edge, but increases focus on everything inflation related from here, including incoming data like the inflation expectations in the July flash University of Michigan sentiment survey release on Friday, but also anything anecdotal in the Fed Beige Book out tomorrow evening. It also puts Powell in the hot seat in testimony before Congressional panels tomorrow and Thursday, but also in general heading into the FOMC meeting the week after next as data like this raises the risk that the Fed will have to make an embarrassing retreat from its complacent stance on inflation and have to reach out soon to taper MBS purchases and perhaps even US Treasury purchases sooner rather than later.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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