Written by US and Iran agree on MoU; Trump’s approval awaited
The US dollar slipped against all its major counterparts on Thursday, and although it stabilized somewhat today, it extended its fall against the kiwi after Reserve Bank of New Zealand (RBNZ) Governor Anna Breman said that rate hikes are likely to be delivered faster than previously anticipated to prevent inflation from spiraling out of control.
The retreat in the dollar coincided with further declines in oil prices as headlines hit the wires that the US and Iran reached consensus on a 60-day memorandum of understanding (MoU) that will include complete restoration of transit through the Strait of Hormuz, the end of the US blockade of Iranian ports, and commitment by Iran to refrain from developing nuclear weapons. US President Trump was informed about the details of the final deal, but he asked for a couple of days to think about it.
Agreeing on the memorandum will mean the biggest breakthrough in the conflict and could push the dollar and oil prices even lower, especially if the Strait of Hormuz fully reopens.
The dollar retreated even as the PCE data confirmed that inflation in the US accelerated in April. The headline PCE rate rose to 3.8% y/y from 3.5%, while the core one ticked up to 3.3% y/y from 3.2%. Both metrics matched analysts’ consensus estimates.
With the PCE data confirming what the CPI and PPI figures revealed, investors focused more on the headlines about the MoU, and thus, they somewhat scaled back their Fed rate hike bets. Now, a 25bps hike is fully priced in for April, while the probability of it being delivered by December has slid to 60%.
That said, the fact that investors are still expecting interest rates to increase suggests that they remain worried about inflation. Even if the MoU is signed, oil prices remain higher than a year ago, which, combined with the 6% PPI rate, suggests that it may take time for inflation to retreat back to the Fed’s objective of 2%. This is likely to limit any future dollar declines.
BoJ ready to hike despite slowdown in core Tokyo CPI
In Japan, the core Tokyo CPI slowed to 1.3% y/y from 1.5%, remaining below the Bank of Japan’s target of 2% for a fourth consecutive month. That said, the data does little to alleviate pressure from the BoJ to raise interest rates at its upcoming meeting, as consumer prices are forecast to reaccelerate in the coming months, feeling the heat, not only of surging oil prices, but of the yen’s weakness as well.
Indeed, market participants maintain a strong 70% chance of a BoJ rate hike at the upcoming gathering. After all, a rate hike may be a prerequisite if Japanese officials want to prevent the yen from falling further. Yes, intervention risk remains elevated, but for any action to have the desired effect, the BoJ may have to proceed with a series of interest rate increases in the months to come.
S&P 500 and Nasdaq at new records, gold rebounds from 200-day MA
On Wall Street, the Dow Jones closed virtually unchanged, but both the S&P 500 and the Nasdaq rose to new record highs, with the latter gaining nearly 1%. The reports about the US and Iran reaching common ground and agreeing to extend the ceasefire allowed investors to increase their risk exposure, but the main driver behind Wall Street’s rally remains the euphoria surrounding Artificial Intelligence (AI).
This time, truce hopes allowed gold to rebound as well. The retreat in Treasury yields, the pullback in the dollar, and the pushback in Fed rate hike expectations, all contributed to reducing the opportunity cost of holding the metal, which rebounded from near its 200-day moving average.
by XM.com
