Soft US inflation boosts sentiment

US consumer prices eased in July, and they eased more than expected. The CPI data printed 8.5% on Wednesday, versus 8.7% expected by analysts and 9.1% printed a month earlier. The slower-than-expected inflation figure revived the hope that last month’s 9.1% was maybe a peak, and we could see a potential reversal in inflation trend. And if that’s the case, the Federal Reserve (Fed) could slow down its rate hikes, or opt for smaller hikes. Activity on fed funds futures now gives more chance for a 50bp hike in September’s FOMC meeting, whereas the odds were pointing at a 75bp hike before the CPI print. 

Not surprisingly, the US yields pulled lower after the CPI print, the US 10-year yield retreated to 2.67% before rebounding back to 2.80%. The US dollar index slipped below the 50-DMA support for the first time since February this year, and the US stock markets cheered up. The S&P500 jumped 2%, above the critical 4200 resistance and closed the session above this level, as Nasdaq rallied near 3%.  

Yet, two FOMC members warned, right after the data, that the war against inflation is not won just yet. It’s of course great to see the latest inflation print come lower-than-expected, but first, one data point doesn’t make a trend, and we had a similar surprise earlier this year, but then inflation spiked to fresh multi-decade highs the following month.  

And second, the cooldown in July inflation was mostly due to the softer energy prices, but food prices continued surging, wages and rents remain on a positive path. 

The softer-than-expected CPI data weakened the dollar, and sent many majors and gold higher against the greenback yesterday. The price of an ounce of gold advanced to $1807, but bounced lower below the $1800 quickly. Gold remains in a positive short-term trend and could make another attempt on the $1800 offers, if the 50-DMA support holds near $1784. 

The EURUSD jumped close to 1.0370 mark, but saw decent resistance above the 50-DMA, which stands at 1.0340. Cable, on the other hand, made another attempt to 1.2272 but failed to extend gains into the 1.23 mark.  

It will likely be hard for the pound sterling to post a meaningful recovery even if the dollar softens more, as there are too much political uncertainties in Britain following Boris Johnson’s resignation. Liz Truss, who is leading in polls, is clearly not good encouraging for the pound, as she intends to change the Bank of England’s (BoE) inflation targeting to something more flexible, including money supply, or GDP. The latter could loosen the monetary conditions in an economy that’s already dealing with almost double-digit inflation, and it’s not yet priced in the market valuations. Therefore, and given Britain’s political and monetary situation, even if the US dollar softened, it may not soften too much against the pound.  

FTSE 100, on the other, should benefit from firmer energy prices. 75% of the FTSE 100 revenues come from abroad. The British blue-chips limited exposure to British politics, and the pound, should keep the index on track for more gains, if global recession fears remain contained.