Written by US inflation jumps more than expected in April
The US dollar finished the day higher against all the other major currencies yesterday as following the rising anxiety surrounding the US-Iran conflict, the hotter-than-expected US CPI data came in to add to fears about inflation spiraling out of control.
The headline CPI rate jumped to 3.8% y/y in April from 3.3%, while the core rate rose to 2.8% y/y from 2.6%, both confounding projections of smaller increases to 3.7% and 2.7%, respectively. The data confirmed that elevated energy prices are impacting consumer prices and thereby added more fuel to expectations that a rate hike may be delivered at some point next year. According to Fed funds futures, the probability of a 25bps increase by April climbed to around 80%.
Today’s agenda includes the US PPI figures for April, and another set signaling stickier than expected inflation could leave incoming Fed Chair Kevin Warsh little room for maneuver when it comes to interest rates. He may also come under pressure by President Trump to lower interest rates if he insists that they should remain higher for longer. It will be interesting to see whether he will convince market participants that he remains as independent as he supported in recent speeches.
Trump-Xi talks in focus amid rising Middle East tensions
Setting sights on the Middle East, after saying on Monday that the US-Iran ceasefire is on life support, US President Trump told to a radio talk show that they cannot let Iran have a nuclear weapon, because they would use it.
Focus will now shift on Trump’s three-day trip to China, with investors hoping that his meeting with President Xi could help resolve the stalemate. China is a major buyer of Iranian oil and thus, it could take the role of a guarantor of any agreed accord. To gain China’s sympathy on the matter, Trump may also loosen his tariff policy against the world’s second largest economy.
Positive news stemming from the Trump-Xi meeting could revive risk appetite and may allow some liquidation of long dollar positions. At the same time the Fed rate hike probability may ease somewhat, but as long as the Strait of Hormuz remains blocked – and thereby oil prices elevated – it is unlikely to fall dramatically. This could keep a floor to any China-related declines in the greenback.
Rate hike bets weigh on tech, gold pulls back
On Wall Street, the Dow Jones inched slightly higher, but the S&P 500 and the Nasdaq pulled back, with the latter experiencing the biggest losses as fears of sticky inflation and bets of higher interest rates may have weighed on the present values of high-growth tech firms.
However, stock futures of the S&P 500 and the Nasdaq are on the rise today, perhaps reflecting hopes that the Trump-Xi meeting could result in positive headlines about tariffs and the Middle East. What is also keeping any pullbacks on Wall Street limited is the solid corporate results, especially in AI-linked tech and semiconductor firms during the Q1 earnings season.
Gold has also been affected by the bolstering of rate hike bets, pulling back after hovering near the 50-day exponential moving average. However, it remains above the key support zone of $4,640, and an encouraging message from China could encourage the bulls to reenter the battle and perhaps target the $4,840 zone.
by XM.com
