US Inflation Falls to 3%

US inflation data released yesterday showed a stronger than expected fall, boosting hopes that the Fed will only hike once more in the current cycle, sending the Dollar lower and risky assets firmly higher.

1. US CPI (inflation) data released yesterday showed a month-on-month increase of 0.2%, lower than the 0.3% which was expected, sending the annualized rate to a long-term low of 3%, below the 3.1% which was the consensus forecast. The data has sent stock markets strongly higher, and the US Dollar Index to a 1-year low, while the EUR/USD and the GBP/USD currency pairs rise to new 15-month highs, the latter trading above $1.3000. Major stock market indices are also seeing big rises, with both the NASDAQ 100 Index and the S&P 500 Index hitting new 1-year highs yesterday. The outlook is bullish for risk assets and bearish for the US Dollar as there is now a more dovish expectation on further US rate hikes, and trend traders will be positioned in these directions. A hike is still expected at the next meeting, but it is seen as likely to be the final hike in this monetary tightening cycle.
2. The Bank of Canada held a policy meeting yesterday at which, as expected, it raised its interest rate by 0.25% to 5.00%. The Bank also stated that underlying inflationary pressures had become more persistent, suggesting that it will take longer to bring down inflation, which is hawkish rhetoric. This has triggered relative strength in the Canadian Dollar.
3. The Reserve Bank of New Zealand left its interest rate unchanged at its policy meeting yesterday but stated that inflation remains too high. The New Zealand Dollar initially dipped a little following the release, but then returned to rising strongly in line with the strong risk-on movement in the markets.
4. Bitcoin remains below what seems to be a very pivotal round number at $31k, with the price action now looking more uncertain, suggesting that a bullish breakout may not be likely.
5. There will be a release of US PPI data later today which will be keenly watched to see whether it matches yesterday’s lower inflation data, as well as a release of unemployment claims.
6. There will be a release of UK GDP data today, which is expected to show a month-on-month contraction of 0.3%.