Red-hot US CPI steady ECB fail to move dollar; yields slide

Pound Rallies, Euro Flat, AUD, NZD, EMS, Stocks Climb

Summary: A red-hot US CPI number, the highest read in 13 years failed to budge the Dollar against its major rivals. The May Headline Consumer Price Index increased 0.6% after surging 0.8% in April, higher than median forecasts at 0.4%, the largest gain since June 2009. Annually, May’s Headline Inflation rose to 5.0% compared to 4.2% in April. Markets had anticipated the inflation rise which has been consistently downplayed by Federal Reserve officials. Stocks rallied while treasury yields extended their slide. The US 10-year bond yield slid to 1.44%, its lowest close since March. Germany’s 10-year Bund yield was last at -0.26% (-0.25%). The US S&P 500 rose to a record before closing at 4,238, up 0.35%. The European Central Bank left rates unchanged (0.00%), upgraded growth forecasts but avoided any taper talk. The Euro finished flat in New York, at 1.2176 (1.2174) after initially rallying to 1.2218 overnight. Sterling defied gravity, rallied to a 1.4175 in late New York (1.4111 yesterday), finishing as best performing major. The British Pound shrugged off a possible delay in its June 21 “Freedom Day” reopening. Risk-leading AUD/USD rallied to finish at 0.7755, near weekly highs on the firmer equities and generally weaker Greenback. The Dollar slid against the Japanese Yen to 109.32 from 109.63, weighed by softer US yields. Against the Emerging Market and Asian currencies, the Greenback also lost ground. The USD/SGD pair slid to 1.3232 from 1.3244 while USD/CNH eased to 6.3850 (6.3880).
Other data released yesterday: Japan’s May Producer Prices rose to an annual 4.9% from 3.7% in April. UK RICS House Prices rose to 83% from 75%. French Industrial Production in April slipped to -0.1% from an upwardly revised March figure of 1.0% (from 0.8%). China’s May New Loans rose to CNY 1.500 billion from April’s CNY 1.470 billion. Claims for Unemployment Benefits in the US in the latest week improved to 376,000 from the previous week’s 385,000, but above forecasts at 370,000.

• EUR/USD – A steady-as-she goes ECB failed to shake the shared currency. EUR/USD initially dropped to an overnight low at 1.21432 before steadily climbing back to session to close at 1.2173, little changed from yesterday.
• GBP/USD – had a lively session slumping to 1.40729 after reports that the UK’s much anticipated “Freedom Day”, Britain’s June 21 reopening would be delayed. The British Pound rallied against the weakening US Dollar, which failed to gain despite the hot inflation number.
• USD/JPY – The Dollar slid against the Yen as the US 10-year bond yield extended its decline to 1.44% (1.49% yesterday), lows not seen since March. USD/JPY closed at 109.31 from 109.63 yesterday. Japanese 10-year JGB yields were last at 0.04% from 0.06% yesterday.
• AUD/USD – firmed off its base at 0.77152 (overnight low) to 0.7755 in late New York, matching its highs for the week. Overall USD weakness and stronger equities have buoyed the Australian Battler.

On the Lookout: Last night’s red-hot US inflation numbers failed to excite the markets and lift the US Dollar. Federal Reserve officials have continually repeated their mantra that the rise in US inflation is “transitory”. Today sees the release of the US University of Michigan Consumer Sentiment report where gains are expected.
Other data releases today are: New Zealand’s May Business PMI’s, just released, rose to 58.6 from 58.4 April. NZD/USD was little changed from its NY close at 0.7195. Japan releases its Q2 BSI Manufacturing Index (f/c to climb to 1.9 from 1.6). The UK kicks off in Europe with its UK April GDP (f/c between 2.2% - Finlogix, and 2.4% FX Factory) from March’s 2.1%. UK April Industrial Production follows (f/c m/m 1.2% from 1.8% and y/y 30.5% from 3.6% - Finlogix). The UK’s April Manufacturing Production follows (f/c m/m 1.5% from 2.1% and y/y 41.8% from 4.8% Finlogix). UK Goods Trade Balance for April follows (f/c -GBP 12.1 billion from -GBP 11.71 billion – Finlogix). Germany reports its May Wholesale Prices (f/c 0.9% from 1.1% - FX Factory). US Preliminary June University of Michigan Consumer Sentiment Index rounds up the day’s reports (f/c 84.0 from 82.9 – Finlogix). The G7 summit continues in the UK resort city of Cornwall.

Trading Perspective: There was much anticipation in FX markets into the US CPI number and ECB policy meeting. The US Dollar attempted to break higher, but the bond and stock traders knew better, and kept their focus on the “transitory”, rather than the permanent inflation variables. Today see the release of US Preliminary June University of Michigan Consumer Sentiment Index report. A higher read is forecast, to 84.0 from the previous 82.9 in May. Watch for the reaction in the bond markets, and the US 10-year treasury yield.
Its Friday today and we can expect FX to consolidate within familiar ranges first up. The risk is complacency at current levels. We reported earlier this week that speculators sold additional US Dollars/bought Currencies in the latest COT report (week ended June 1). A higher than forecast US UOM Consumer Sentiment Index report could see Dollar shorts racing for cover. This is where the risk lies.

• EUR/USD – the shared currency traded in a relatively tight range between 1.21432 and 1.21947, finishing at 1.2173, little changed from yesterday’s close at 1.2175. The ECB had no surprises for Euro traders. Despite upgrading future growth and inflation projections, President Christine Lagarde and her colleagues avoided any taper talk. EUR/USD has immediate resistance at 1.2200 and 1.2230. Immediate support lies at 1.2140, 1.2110 and 1.2080. Look for a likely trade between 1.2130 and 1.2200. The risk is lower as the speculators continue to hold on to long Euro bets.
• GBP/USD – Sterling managed to climb near session highs at the close, to 1.4175 (1.4110) finishing as best performing currency. The British Pound shrugged off the talk of a possible delay in the UK’s reopening “Freedom Day”. GBP/USD has immediate support at 1.4140, 1.4110 and 1.4070. Immediate resistance can be found at 1.4190, 1.4210 and 1.4230. Look for a likely trade between 1.4110-80 first up. While speculators pared their long GBP bets (latest COT report ended June 1), the risk is for a lower Pound, given that the markets have shrugged off any potential bad news. UK GDP, Trade, Industrial and Manufacturing Production numbers are out tonight. Any surprises could shake Sterling up.
• USD/JPY – The Dollar slid against the Yen to a 109.33 close, not far off its overnight low at 109.313. The slide in the US 10-year yield to 1.44%, March lows weighed on this currency pair. However, Japanese 10-year JGB yields also dipped, by 2 basis points to 0.04% (from 0.06%). This should cushion and further USD/JPY falls. Overnight high traded was 109.795. Immediate support can be found at 109.30, 109.00 and 108.70. Immediate resistance lies at 109.60, 109.90 and 110.20. Look for the USD/JPY to trade between 109.30-109.80. Watch the US 10-year bond yield tonight for clues.
• AUD/USD – The Aussie Battler rebounded off its lows at 0.77152 to 0.77635 overnight high supported by the easing Greenback and rising equities. AUD/USD closed its New York session at 0.7755, up from yesterday’s 0.7730 opening. The Aussie has immediate resistance at 0.7770 and 0.7800. Immediate support can be found at 0.7735, 0.7715 and 0.7685. Expect the Aussie to trade in a likely 0.7720-70 range today. Good numbers out of the US tonight may just lift the Greenback out of its doldrums and punish the Aussie. Prefer to sell rallies.

Happy Friday and trading all. We have a long weekend in Australia coming up (Queen’s birthday Monday). Have a good one all.