Currency Point: The genie is well and truly on the loose

US inflation is clearly running rampant, a headline read of 9.1 per cent the highest read in over 40 years was not the most shocking part of the print. It was that inflation is broad
based. You could excuse if this was all down to energy and food and in the main these two sectors are major contributors with fuel surging and food supply under pressure. The biggest issue is that its demand inflation that is now taking over. Shelter, automotive and discretionary inflation are growing at higher than expected levels and even with the Fed’s latest rate increases are yet to put dents into this.

The speculation that front loading the Federal funds rate will be even harder were everywhere on the release of the inflation read and saw the USD surge to new 20-year highs. However there has been some cold water on those speculations from Fed speakers.

Here is Fed governor Chris Waller “The CPI data was a ”major disappointment” but not a big surprise.” He has a 75 basis point (bps) rate rise down for July however did give some wiggle
room for a larger 100bp hike, if the retail sales and housing data goes the same way over the coming weeks.

He also suggested pricing has overreached and that we should not expect a recession given the strength in the labour market but does expect the economy to slow. Will support ongoing hikes until he sees ”significant moderation” in core PCE prices. Then there is St. Louis Fed president Jim Bullard the uber-hawk and even he is sticking with a 75bp hike for July, as: “So far, we’ve framed this mostly as 50 versus 75 at this meeting. I think 75 has a lot of virtue to it” (its believed to be the neutral rate). “As of today, I would advocate 75 basis points again at the next meeting.”

From the point of view of FX – all roads lead to the USD EUR/USD fell through parity to $0.9952 a new 20-year low before popping back above to $1.0020 but it’s only a matter of time before it retests. GBP/USD hit $1.1760 it back at $1.18 but again the USD looks like overwhelming any buying in GBP.

USD/JPY was, up 1.2% to ¥139.00, with a high of ¥139.39, a level not seen since 1998, there is no stopping this pair.

AUD/USD hit a 2 year low of $0.6682 before recouping the $0.67 level – 70 cent looks a distance memory for now.