NZD underperforms despite a broadly weaker USD

Key Movers

Price action across major currencies varied through trade on Tuesday with the USD tracking sideways against the euro while extending declines against the yen and the pound and advancing against commodity-led currencies. Having punched through ¥144.50 last week the USD extended its depreciation against the yen, giving up ¥141 as markets unwind speculative JPY shorts amid stretched positions and key macroeconomic updates with the dollar on the back foot the GBP extended toward its highest in 15 months, consolidating a break above US$1.29 following another robust UK labour market print. Wage growth remains stubbornly high in the UK with average weekly earnings (excluding bonuses) climbing 7.3% all but guaranteeing the Bank of England will issue another 50-point rate hike in early August. With unemployment stable gilt yields adjusted higher as 2 and 10-year bonds jumped 6 and 2 basis points respectively. With fears a wage-price spiral is emerging expectations for tighter monetary policy are being priced into the front end of the UK yield curve, helping ad near-term support for the GBP. However, with the economy on the brink of recession and growth concerns beginning to overwhelm yield plays we expect the pound will come under pressure moving into year end if price pressures are not contained.
Our attentions turn now to tonight's all-important US CPI print. We expect the headline rate will fall from 4% to 3.1% with core inflation crucially falling to 5%. Any stubbornness in core inflation will all but guarantee at least two more Fed rate hikes as it works to sustainably bring inflation back to its 25 target.