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USD weaker as US inflation softens

By OFX

US Consumer Price Index figures were released this morning, with year over year for April printing a 2.1% Y/Y CPI was expected at 2.2%. With the inflationary gauge softening the greenback is falling against its G10 counterparts, the EURUSD has moved .65% higher after the release. Market participants may start to price in a more cautious tightening stance on interest rates from the Federal Reserve for the end of the second quarter.

US Jobless claims release this morning, with the market expecting 219k were better at 211K.

The dollars rapid advance over recent weeks seems to be coming to an end with EUR/USD seeming to have found a floor at 1.18 and USD/JPY a ceiling at 110. After the sharp moves of late more moderate gains now seem more likely and the latest CPI numbers from the States due this afternoon are the next figures that will guide its direction. After last month’s drops the core and overall reading are expected to move higher by 0.2% and 0.3% respectively m/m. Unemployment Claims are due to show further evidence of a very tight labor market with 219k expected. As US/Iran relations continue to deteriorate US/North Korea relations continue to improve with North Korean leader Kim Jong-Un releasing three American detainees on the back of US Secretary of State, Mike Pompeo’s visit to Pyongyang. The gesture seems to have aided risk sentiment with USD/JPY making another play for 110.

The Canadian dollars is up another half of a percent from yesterday’s close. Strength in the loonie comes from oil prices moving higher, WTI crude trades at 71.54 as we write. Oil prices have spiked due to President Trumps mandate to abolish the Iran Nuclear Agreement and reinstate heavy sanctions on the world’s third-largest oil producer, the increase in Middle East tensions is pushing market participants to long oil contracts. The Canadian dollar is benefiting as the oil products and services are a significant component in the Canadian economy.

Tomorrow Statistic Canada will report the Canadian employment numbers and the unemployment rate, and expectations are for 20K and 5.8% respectively

Also helping the CAD, Canadian government yields have been increasing, with the 2-year at an eight-year high. Also helping the CAD last night, building permits came much stronger than anticipated (3.1% vs 2.0% expected).

It’s a relatively quiet day in Europe as many countries enjoy the Ascension Day public holiday so thin trading could lead to some bigger than expected moves in the forex world.

The only notable event for the rest of the week in the Eurozone is a speech by ECB President, Mario Draghi in Florence although no hints on a possible QE taper is expected before the June monetary policy get-together. EUR/USD trades at 1.1865 and GBP/EUR is back above 1.14. 

Bank of England’s latest interest rate decision along with its quarterly Inflation Report was released. The central bank leaves interest rates unchanged at 0.50%. Around three weeks ago it was all but guaranteed that we would be seeing a 25bp hike in Bank Rate however after a stream of soggy data and a dovish interview by BoE Governor, Mark Carney with the BBC where he highlighted (again) his concerns the impact Brexit could have on the UK economy.

The likelihood of a hike have therefore dropped from around 80% chance to 15% chance and the pound has tanked as a result. The Inflation Report will contain its latest predictions for growth as well as inflation with downgrades expected to both. What traders will be looking out for is the message that Carney gets across as to the timing of future rate hikes. Should he indicate August is a live vote then expect sterling to rally, should he indicate hiking this year is an option it could swing either way and should he close the door on rate hikes this year altogether then we will likely see the pound drop another leg lower.

Before that we have Manufacturing Production figures at 9:30am with another -0.2% reading expected. GBP/USD is heading lower after a buoyant Asian session trading around the 1.3550. 

The Australian dollar edge marginally higher through trade on Wednesday bouncing of supports and 11-month lows as investors took stock and profits. Having fallen to intraday lows at 0.7413 the AUD rebounded to touch session highs at 0.7470 buoyed by short term and mid-level USD profit taking amid sessions lacking any real headline macroeconomic data events. Investors looked to cash in on recent USD upside, however, a rise in 10 year and 2 year treasury notes beyond all important 3% and 2.5% handles capped losses and ensured the AUD’s recovery was largely muted. 

The AUD appears to be entering a new broader range with fair value sitting at or near 0.74 and upward gains capped on moves toward 0.7580/0.76. Having broken supports at 0.7430 yesterday there is now scope for the AUD to shift lower and break toward 0.7380. 

Attentions now turn to key central bank commentary from the RBNZ and BoE for a view to broader global inflation expectations.

The New Zealand Dollar remained below the US 70 cent handle in trading yesterday and remained range-bound in the lead up to the latest RBNZ cash rate decision. As expected this morning interest rates were left on hold at 1.75% and unchanged since November 2016. Opening yesterday morning at 0.6970, the Kiwi eventually topped out at 0.6995 heading into the European session. 

The potential to push back through the US 70 cent mark was quickly erased this morning after RBNZ Governor Adrian Orr released his first monetary policy statement since coming into power on the 27th March. Remarks on softer inflation levels and a downgrade in GDP growth saw a more dovish statement than expected and thus delaying any expectation of higher moves for the official cash rate till Q3 2019. 

The Kiwi immediately gapped lower and was sold off in droves as we saw a low this morning of 0.6926. Orr remarked that the next move for rates could equally be up or down. RBNZ Governor Orr is due to testify shortly before the Finance and Expenditure Select Committee in Wellington with the latest Monetary Policy Statement to be at the forefront of discussions. Traders will be anxiously looking to pick up on any further clues following his dovish statement.