USD risks skewed to the downside as technical levels broken

USD: Inflation relief as Powell remains balanced

The CPI data today comes with the US dollar on a weaker footing after a PPI report yesterday that was mixed enough to provide some relief to the markets. Still, it is indicative of market pricing that a 0.5% m/m gain for headline and core PPI prompts a decline in yields and the US dollar. Admittedly, the PPI details were not all bad which helped shape the market response. The PPI elements that feed into the PCE data at the end of the month were more subdued, which has helped ease fears over today’s CPI print. The core services CPI component will be key today as this has been the segment producing upside surprise. Of the 3.47% YoY in CPI, 91% of the increase is in core services (including housing). As can be seen below, on a 3mth and 6mth annualised rates of ‘supercore’ CPI (core services, ex-housing) have surged over recent months.

Fed Chair Powell spoke in Amsterdam yesterday and expressed confidence on rental inflation in CPI coming down to reflect actual rental prices which have slowed notably but was less confident about ‘supercore’ and expected the decline to be slower. Some easing in this segment will be key and would certainly help reinforce the modest drop in yields and the dollar yesterday. Within the ‘supercore’ segment, last month the increase was primarily about transportation costs (specifically car insurance) and medical care services (specifically hospital services). While not directly linked to today’s report, the PPI car insurance reading was subdued yesterday offering optimism over the coming months that this element should slow.

Fed Chair Powell’s speech in Amsterdam was overall balanced and failed to illicit any shift in market thinking over the timing of the first rate cut. He repeated the need for rates to remain higher for longer but again dismissed the idea of another rate hike. Importantly, Powell added that he believed labour demand was “cooling off pretty substantially” which is probably the primary source of expectation that core services inflation will gradually weaken going forward and allow the Fed to cut. Including today, there are three CPI reports before the July FOMC meeting so we certainly should not rule out July for a first rate cut if that meeting follows three favourable CPI reports.

Of course, the CPI data will dictate market moves this afternoon and indeed could dictate moves through to the payrolls report in June. After three upside surprises in the CPI data we would lean toward a more favourable report today that would help maintain the current momentum. The softer dollar is also technical. EUR/USD broke more clearly above the 50-day and 200-day moving averages yesterday and broke the 100-day moving average today. A CPI print that doesn’t contain any nasty upside surprise would probably be enough for this current move weaker for the dollar to be extended. We certainly sense less conviction on the divergence trade that was fuelling dollar strength. The 2-year EU-US swap spread has now more than fully reversed the widening that took place after last month’s US CPI data on 10^th April.

3MTH & 6MTH ANNUALISED CHANGE IN US SUPERCORE CPI   

Source: Macrobond, Bloomberg & MUFG Research

USD: Biden acts but polls will be a concern

There will probably be nobody more eagerly watching the release of the US CPI data today than President Biden. If he is going to win a second term, it must surely only happen if inflation recedes quickly into the election in November. A White House spokesperson stated yesterday that the implementation of tariffs on China imports of EVs, steel and aluminium and other products was not political and was done to act in advance of the threat of a sharp increase of EV imports from China. The response from China was clear, calling on the US to cancel the tariffs and promising “resolute measures” to safeguard its own interests. None of the tariffs implemented by President Trump which were reviewed by the Biden administration was reined back.

But given all the action taken by President Biden to support the economy, the polling continues to point to a high risk of defeat in the November election. The Inflation Reduction Act, the Chips and Science Act, the relatively strong growth and low unemployment do not get recognition. A New York Times / Siena poll this week revealed Biden behind Trump in every swing state except for Michigan when probable voters were polled. When registered voters were polled, Biden is behind in all swing states except for Wisconsin. An FT-Michigan Ross survey published this week revealed that 80% of respondents cited high prices as the biggest financial challenge. 58% disapproved of Biden’s handling of the economy, up from 55% last month.   

Trump’s response to yesterday’s announced tariffs was that Biden hasn’t gone far enough and should have acted sooner. That gives us some sense of what would come if Trump wins in November. A Trump victory would certainly lift the US dollar initially although the sequencing of policies will be important beyond any initial strength. Focusing on domestic issues (immigration / fiscal spending) might see the dollar retrace but a focus on trade would likely see dollar strength extended (of course what the economy and the Fed is doing then will be key too). But November is still some way off and for Biden easing inflationary pressures would help considerably. So weaker inflation data is not only a USD bearish signal from a rates perspective, it is too from a political perspective in increasing the chance of a Biden victory in November.

EUR/$ IMPLIED VOL SPREAD 6MTH OVER 3MTH CAPTURES ELECTION RISK

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	10:00	Employment Change (QoQ)	--	0.3%	0.3%	!
EC	10:00	GDP (QoQ)	--	0.3%	-0.1%	!!
EC	10:00	GDP (YoY)	Q1	0.4%	0.1%	!!
EC	10:00	Industrial Production (MoM)	Mar	-0.3%	0.8%	!!
EC	10:00	Industrial Production (YoY)	Mar	-1.2%	-6.4%	!
US	12:00	MBA Mortgage Applications (WoW)	--	--	2.6%	!
CA	13:15	Housing Starts	Apr	232.0K	242.2K	!!
US	13:30	Core CPI (MoM)	Apr	0.3%	0.4%	!!!!!
US	13:30	Core CPI (YoY)	Apr	3.6%	3.8%	!!
US	13:30	CPI (YoY)	Apr	3.4%	3.5%	!!!
US	13:30	CPI (MoM)	Apr	0.4%	0.4%	!!!!
US	13:30	NY Empire State Manufacturing Index	May	-10.80	-14.30	!!
US	13:30	Core Retail Sales (MoM)	Apr	0.2%	1.1%	!!!
US	13:30	Retail Control (MoM)	Apr	--	1.1%	!!!
US	13:30	Retail Sales (YoY)	Apr	--	4.27%	!
US	13:30	Retail Sales (MoM)	Apr	0.4%	0.7%	!!!
US	13:30	Retail Sales Ex Gas/Autos (MoM)	Apr	--	1.0%	!!
CA	13:30	Manufacturing Sales (MoM)	Mar	-1.4%	0.7%	!
US	15:00	Business Inventories (MoM)	Mar	0.0%	0.4%	!!
US	15:00	NAHB Housing Market Index	May	51	51	!
US	15:00	Retail Inventories Ex Auto	Mar	-0.1%	-0.1%	!!
US	17:00	FOMC Member Kashkari Speaks	--	--	--	!!!
US	20:20	FOMC Member Bowman Speaks	--	--	--	!!!

Source: Bloomberg