Dollar plummets as US data supports Fed rate cuts

The dollar tumbled against all its major peers yesterday after the US CPI data revealed that inflation in the world’s largest economy resumed its downtrend in April, allowing investors to ramp up their Fed rate cut bets.

Both the headline and core year-on-year CPI rates slid to 3.4% and 3.6% from 3.5% and 3.8%, respectively, in line with analysts’ forecasts. However, the monthly headline rate was a tad below expectations, which combined with a flat retail sales figure added to the narrative that the conditions for the Fed to start cutting rates are falling into place.

According to Fed funds futures, a 25bps reduction remains fully priced in for September, while the total number of basis points worth of cuts by the end of the year has risen to 51 from around 45 ahead of the release.

Today, the spotlight will likely turn to the initial jobless claims for last week, as well as to speeches by Atlanta Fed President Raphael Bostic, Cleveland President Loretta Mester, and Philadelphia President Patrick Harker.

Following the weaker than expected jobs report for April, traders may closely monitor the jobless claims numbers to see whether the softness rolled into May, and they may be eager to listen to what Fed officials have to say after the CPI data.

The yen extended its advance into the Asian session today, even after data revealed that the Japanese economy contracted by more than expected in Q1, which is likely to complicate the Bank of Japan’s intention to hike interest rates again in the coming months.

Perhaps this was due to US Treasury yields extending their retreat in Tokyo trading and falling more than the Japanese ones. That said, although the drop in dollar/yen would likely keep Japanese authorities at bay, more data suggesting that a BoJ hike may not be warranted in the summer months could push the yen back down and thereby increase the chances for another round of intervention.

The Australian dollar was yesterday’s main gainer, along with the kiwi, but the advance was stopped today, with the risk-linked currency giving back some of yesterday’s winnings. That was due to Australia’s employment numbers, which showed that although the economy added more jobs than expected in April, the unemployment rate rose to 4.1% from 3.9%, taking rate hike expectations off the map.

All three of Wall Street’s main indices skyrocketed to fresh record highs yesterday as the US inflation data convinced market participants that future cash flows are likely to remain supported due to expectations of more rate cuts by the Fed. Combined with a better-than-expected earnings season, bets that the Fed could cut rates deeper than previously thought may allow Wall Street investors to continue exploring uncharted territories.

Gold also benefited from the slide in the US dollar and Treasury yields, getting closer to its own record highs.  The fact that the metal defied the prior hawkish repricing about the Fed’s future course of action suggests that there may be more forces keeping it supported, one of which is the elevated purchases by the People’s Bank of China (PBoC).