Forex Today: US Dollar sells-off following US CPI

After the sharp decline of the US Dollar, more US inflation data is due on Thursday with the Producer Price Index. During the Asian session, Australia's Consumer Inflation Expectations and China's trade data are due. Later, the UK will release GDP data.

Here is what you need to know on Thursday, July 13:

As expected, inflation data from the US led to sharp market moves. The US Dollar plummeted, commodities soared, and Wall Street cheered the potential end of the Federal Reserve's interest rate hiking cycle.

Data from the US showed the Consumer Price Index (CPI) rose 0.2% in June, and the annual rate slowed to 3.0%, the lowest since March 2021, well below the 9.1% peak of June 2022. Evidence that inflation continues to slow steadily softened expectations of more rate hikes from the Fed after the July meeting. Market participants still see the central bank hiking 25 basis points the Fed Funds rate in July, but it could be the last one.

The Dow Jones gained 0.25%, and the Nasdaq climbed 1.15%. The US 10-year Treasury yield fell to 3.85%, and the 2-year to 4.75%, the lowest since June 29. The repricing of Fed expectations pushed the US Dollar to the downside. The DXY dropped to the 100.50 area, posting its lowest daily close in a year.

Analysts at Wells Fargo: 

Today's softer-than-expected print with signs of pandemic-era distortions fading provides additional evidence that disinflation is occurring in real-time. Looking ahead, we expect the more moderate pace of price growth signaled by the June CPI to continue.

The improvement relative to the 4.6% pace of core inflation in the first half of this year will likely be enough to where the FOMC believes it can sit and wait for the effects of prior tightening to work through the economy after one additional 25 bps hike at its next meeting on July 26. However, with the underlying trend in inflation likely to be stuck closer to 3% than 2%, rate cuts remain a long way off in our view.

More US inflation data is due on Thursday with the Producer Price Index (PPI), which is expected to slow from an annual rate of 6.6% to 6.1%, and the core rate from 5.3% to 4.8%. Also, the weekly jobless claims report is due.

Eurozone bond yields also declined, but nonetheless, the EUR/USD jumped to the highest level since March 2022 after breaking above 1.1100. The pair is bullish, with technical indicators at overbought levels. The European Central Bank (ECB) will release the minutes of its latest meeting on Thursday.

GBP/USD reached fresh 15-month highs boosted by the weaker US Dollar and hit 1.3000. The UK will release GDP data on Thursday.

USD/JPY dropped for the fifth consecutive day, falling below 138.50. The Japanese Yen held well despite risk appetite, supported by the decline in government bond yields.

NZD/USD jumped 1.85%, finally breaking the 0.6200/20 resistance area and climbing towards 0.6300. As expected, the Reserve Bank of New Zealand left the Official Cash Rate unchanged at 5.5% as expected. The central bank reiterated the July Monetary Policy Statement. With inflation expected to continue to fall, the RBNZ will stay on pause.

USD/CAD bounced at 1.2143 following a 25 basis point rate hike from the Bank of Canada. However, the Loonie lagged among commodity currencies.

Analysts at the National Bank of Canada:

“To us, the Bank remains very optimistic on the outlook for the economy. Growth in their MPR was revised up in 2023, never dipping below 1% through their forecast horizon. It’s no surprise then that their inflation outlook was also upgraded, the return to 2% pushed out to the middle of 2025. We’re far less optimistic that conditions will remain so rosy, and our growth outlook is well below the Bank’s. To us, we’re already seeing signs that further rate increases are not needed/appropriate”.

AUD/USD also broke a key resistance area at 0.6700 and jumped towards 0.6800. The outlook is positive for the Aussie from a technical perspective. During the Asian session, Australian inflation expectations are due. Also, Chinese trade data is scheduled to be released, which could weigh on market sentiment.

Gold rose almost $30 to the $1,960 area, boosted by the slide of the US Dollar and lower Treasury yields. Silver jumped 4%, breaking above $24.00, to the highest in a month. Cryptocurrencies failed to benefit from the positive risk tone. Bitcoin dropped 0.85% to $30,330. Crude oil prices rose 1.40%.