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US dollar collapses following larger-than-expected drop in US inflation

currency-newsUS dollar collapses following larger-than-expected drop in US inflation
The US dollar nosedived on Wednesday amid signs that US inflation may have peaked following a sizeable slowdown in June.

Meanwhile, the pound is trapped in a narrow range so far this morning, with GBP/EUR flat at €1.1853 and GBP/USD stable at $1.2222. GBP/CAD is muted at C$1.5600, while GBP/AUD and GBP/NZD holding steady at AU$1.7231 and NZ$1.9035, respectively.

Will the US dollar remain on the defensive today with the publication of the latest US PPI figures?

What’s been happening?

The US dollar plummeted around 1% yesterday in response to the latest US consumer price index.

According to data published by the US Bureau of Labor Statistics domestic inflation slowed from 9.1% to 8.5%, missing forecasts for a more modest deceleration to 8.7%. The accompanying core CPI figures reported underlying inflation held at 5.9%, stoking expectations inflation may have peaked.

The softer-than-expected inflation release triggered a sizable USD selloff as investors rushed to reprice their expectations for the next Federal Reserve interest rate hike.

While the euro was able to advance against the US dollar, it struggled to replicate this success against its other peers amid ongoing concerns over a potential European gas shortage.

Meanwhile, the pound was underpinned by an improving market mood, but with its gains being tempered by concerns over the government’s response to soaring energy prices.

What’s coming up?

Turning to today’s session we could see the US dollar extend its losses with the publication of the latest US PPI figures.

The producer price index is forecast to have tumbled from 1.1% to 0.2% in July. The drop could reinforce expectations that US inflation has peaked and may further weaken bets for a 75bps rate hike from the Fed next month.

On the other side of the pond, we could see the pound struggle to find momentum. As a lull in domestic data leaves the focus on UK politics and the apparent paralysis of the UK government as we await the outcome of the Conservative leadership election.

At the same time, the euro may be left to trade sideways so long as EUR investors remain uncertain over Europe’s energy security.
Philip McHugh

Philip McHugh

Joining the corporate trading desk in 2007, Phil now over sees all of Currencies Direct’s corporate dealing activity. Having gained experience working with hundreds of businesses to optimise international payments processes and execute comprehensive risk management strategies, Phil currently works with a portfolio of corporate clients whilst managing Currencies Direct’s overall market exposure

Phil has FCA approval and has completed the Certificate in International Treasury Management (CertiTM)

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