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Dollar whipsaws after not-so-soft inflation data, stocks sink again

XM.COM

  • Dollar on the front foot again after US inflation falls by less than expected
  • Equity markets back in a sea of red as recession risks rise
  • Pound slips to new lows after UK GDP contracts, hawkish ECB can’t save the euro

Dollar bolstered as inflation becoming more sticky

The US dollar climbed to fresh 20-year highs on Thursday as investors ramped up their bets that the Federal Reserve will have to get even more aggressive to bring down burgeoning inflation in the United States. America’s consumer price index rose by 8.3% year-on-year in April, beating forecasts of 8.1% and moderating only slightly from March’s four-decade high of 8.5%. Core CPI also fell by less-than-expected to 6.2%, fuelling concerns that the Fed has a long fight ahead of it.

Although there was a big drop in gasoline prices in April, food prices kept rising while airline fares shot up by 18.6%. Aside from energy, there were signs that the prices of other components have also started to peak as used car and apparel prices declined. But even if inflation falls further in the coming months, it’s looking less and less likely that the Fed will hit its 2% target anytime soon.

The data has solidified expectations that the Fed will hike interest rates by 50 basis points at the next two meetings and whilst policymakers have in recent days been playing down the prospect of the need for a larger increase, the odds for a 75-bps move could gather pace if next month’s print again shows that inflation will remain sticky for some time.

Safe-haven bids boost yen despite dovish BoJ

Investors initially struggled to make sense of the data, sending the dollar higher in a knee-jerk reaction. The greenback then quickly fell back amid some hints that prices are plateauing, but it didn’t take long for the bulls to take charge again.

The dollar index hit a new high of 104.51 earlier today and was higher across the board with the exception of the Japanese yen, which has firmed to around 128.50 to the dollar. The increased risk aversion is boosting the safe-haven yen today as the growing threat of a recession seems to be overshadowing the monetary divergence narrative.

The Bank of Japan displayed no inclination to change its policy course in the Summary of Opinions of the April meeting, going as far as highlighting the positives of a weaker yen.

But the longer it takes for inflationary pressures to subside substantially, the more difficult it will be for investors not to have recession as their base case.

Recession worries mount for euro and pound

For the UK, recession fears have already pummelled the pound, which has plummeted to fresh two-year lows of $1.2164 today. The British economy unexpectedly contracted in March, though it managed to grow by 0.8% for the whole of the first quarter.

The Eurozone economy is also slowing but unlike the Bank of England, which has turned a lot more cautious lately, the European Central Bank is gearing up to lift interest rates in July, with President Christine Lagarde this week joining the chorus of hawkish voices.

Nevertheless, the euro slid sharply on Thursday, breaching its previous support of $1.0470 to brush a more than five-year low.

The risk-sensitive antipodean currencies were the worst hit, with the aussie and kiwi both slumping by around 0.9% against their US counterpart.

Stocks resume slide

Worries about how far the Fed and other central banks will have to go to get inflation under control pushed equities back into negative territory on Thursday following a dip on Wall Street on Wednesday. The tech-heavy Nasdaq Composite tanked by 3.2%, while the S&P 500 closed at a new one-year low, slipping 1.7%.

E-mini futures are pointing to further losses today, dragging European shares sharply down too.

Aside from monetary tightening and the ongoing lockdowns in China, there are renewed concerns about Russian gas flows to Europe and the UK government is threatening to tear up key parts of the Northern Ireland protocol, all of which are amplifying the doom and gloom in the markets

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-dollar-whipsaws-after-not-so-soft-inflation-data-stocks-sink-again-160523
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