US CPI Inflation Data In Focus As Dollar Rally Continues
The dollar continued to attract decent support yesterday, with EUR/USD pushing down toward the $1.17 threshold and GBP/USD trading into the lower half of the $1.38-1.39 range. This coincided with a further sharper rise in US 10-year Treasury yields, which rose by a significant 8bps (0.08%) to a month high of 1.36%. The US Senate did pass a $1.2trn infrastructure bill (that includes $595bn of new spending) yesterday afternoon, but the market action mostly preceded the vote and in any case, the news should have been priced in by this point given that it has been clear for some time that it had sufficient support. Moreover, it remains unclear when/if the House of Representatives will pass the bill. Progressive Democrats have indicated that they will not back it until a separate $3.5trn (worth circa 15% of GDP) bill aimed at alleviating inequality and targeting climate change that Republicans are hostile to is passed.
Data-wise, all eyes will be on the US CPI inflation report for July today. Analysts anticipate that price pressures eased in the month, as re-opening effects began to fade and one-off factors such as the jump in used car prices that accounted for one-third of the rise in the index in May/June reverse. The consensus forecast is for a 0.5% m-o-m rise (prior: 0.9%) in prices, which would leave the headline inflation rate at 5.3% (5.4%). At the same time, the core index (ex-food & energy) is forecast to have risen by 0.4% m-o-m (4.3% y-o-y), after a 0.9% (4.5%) spike in June.
Risks today are tilted to the upside, given the prices paid subcomponent of the non-manufacturing ISM jumped to its second-highest level on record in July. We note that wage inflation also picked up again in the month (4.0% y-o-y), with anecdotal reports suggesting that businesses are passing these costs onto consumers. An upward surprise should nominally offer some support to the dollar, as it will further increase the pressure on the Fed to begin normalising its monetary policy before year-end. However, it may be difficult for the greenback to climb significantly higher given its strong gains over the past week.
The euro remained firmly on the back foot yesterday, with GBP/EUR testing an 18-month high near €1.1830 before retreating back to the €1.18 level overnight. The softness coincided with the release of a weaker than anticipated reading of the German ZEW index for July, which suggested investors are quickly losing confidence in the domestic macro outlook as the delta variant takes hold. While the data were unhelpful, we note that the euro downtrend has been in place since the dovish outcome of the ECB’s July meeting/strategy review announcement, when it raised the bar for policy normalisation even higher by raising its inflation target to 2% and confirming that this target was symmetric.
There was little out to influence sterling yesterday, with the action driven by the other half of its main pairs. We anticipate that it could be more of the same today, given the barren UK macro schedule. Looking ahead, we continue to anticipate that the downtrend in the cable will reverse, on the assumption that Fed Chair Powell maintains his dovish tone at the Jackson Hole economic symposium at end-August, given strong UK fundamentals.