Kiwi can’t hold recovery despite softer US inflation outlook

Key Movers

All in, the net result from the latest US CPI inflation report is somewhat disappointing with major currencies in much the same position as this time yesterday. US CPI inflation for June undershot market expectations, helping drive a depreciation in the annual rate of inflation to its lowest level in more than three years, extending the disinflation narrative. The weak print helped firm bets the Fed will commence an easing cycle, with a 25-basis point rate cut in September. With lower rates expected into year end, treasury yields rallied and the 2- and 10-year rates gave up 12 and 9 basis points respectively. With Fed easing now firmly in sight, the USD weakened in the moments immediately following the data release, giving up ground across the board, before setting about clawing back losses. The euro fell just short of a break above 1.09 and opens this morning back near 1.0870, while the GBP eyed a break above 1.2950 on the heels of a stronger than expected GDP update, before edging back below 1.29. With the AUD, NZD and CAD all relinquishing post CPI gains, the Japanese yen is the only major to hold gains through the daily close. With the USD on the back foot following the softer inflation read, Ministry of Finance and Bank of Japan officials seized the opportunity to step in and defend the embattled yen. The USD/JPY tumbled more than 2%, marking session lows at 157.50, before settling near 159.

Our attentions turn now to US PPI data and consumer sentiment analysis. With the disinflation narrative firmly in play, we are keenly attuned to the PPI report and what it might mean/indicate for the PCE index measure (the Fed’s preferred inflation metric) later this month.