US inflation makes the case for a US rate hike

Dollar stands victorious this week, having accelerated its advance on Friday on the back of stronger-than-expected inflation readings in the US.  The greenback traded with a soft tone the past couple of days amid another round of tepid fundamental releases, coming from the employment and housing sectors. Regional manufacturing and the Markit PMI all missed expectations in May, suggesting the economic slowdown extended into the second quarter of the year. 

Furthermore, the FOMC released the Minutes of its latest meeting, saying that most of the voting members see a rate hike in June as "unlikely." But the dollar came back like a vengeance on Friday, after the release of inflation figures. Were the numbers that bright actually? In fact, not:  The CPI increased 0.1% in April on a seasonally adjust basis against prior 0.2% and fell 0.2% against an expected decline of 0.1%. The core reading, excluding food and energy, matched the previous reading of 1.8% yearly basis, whilst the monthly reading improved to 0.3% from previous 0.2%.

So why is the dollar rallying so sharply? Because we like it or not, the US is the only major economy in the path of tightening its economic policy, whilst the rest continues to struggle with decisions of whether or not extending their stimulus programs. And while a June rate hike may be "unlikely,"  investors are quite convinced that the year won't end without US rates getting a lift. Tepid data is a delay, not a cancellation, for the higher rates case. 

Besides, the greenback is getting "help" from the ECB, as earlier this week, several authorities for the EU Central Bank down-talked the EUR:  Benoit Coeure, member of the Executive board, said in a speech last Monday that short term rates below zero doesn't pose a problem from the Central Bank, against German belief that lower rates are affecting local savers. Additionally, he said that the Central Bank intends to accelerate its purchased of EU assets in May and June ahead of the summer, due to seasonal factors. Words lately supported by President Mario Draghi, in his introductory speech of Central Bankers in Portugal. And let's not forget about Greece: the country is making the head-lines daily basis, only to announce the so long awaited deal with its creditors have not been reached, or that its running out of cash and falling into default, like yesterday…

Chinese poor macroeconomic data, the RBA opening doors for another rate cut this year, oil stalling its rally, gold stuck near its lows and stocks unable to run, all conspire for a bullish dollar. The only problem is that the trade is extremely crowded this year, and downward corrective movements in the greenback, cleaning some shorts, are going to keep on happening. But if something got proved this Friday, is that investors need little excuses to jump into the  crowded USD bull trade. 

During the upcoming week, the market will pay special attention to Durable Goods Orders to be released on Tuesday, housing data scheduled for Tuesday and Thursday, but it won't be until Friday, with the first revision of Q1 GDP that the market will get a clearer picture regarding rates. Anyway, keep in mind that dollar dips, as long as hopes for a rate hike sometime this year subsist, are just buying opportunities, particularly against currencies which Central Banks are looking to keep stimulus up.