The dollar is largely holding onto its gains made last week. Equity markets remain very volatile as investors shuffle portfolios ahead of Friday’s SpaceX IPO. Oracle is due to report earnings after the close today to provide the latest insight into the AI data centre buildout and its revenue opportunities. But it is a big day for US economic data too. The highlight will be the release of the May CPI report, where headline inflation is expected to rise above the 4.0% YoY level for the first time since May 2023 and core CPI is expected to rise 0.3% month-on-month and 2.9% (2.8% prior) YoY. Assuming those levels are delivered, expect the market to continue pricing a Fed hike in December and the dollar to stay supported.
One slight wrinkle for dollar bulls could be the core CPI release. Given the rough make-up of the core basket (shelter 45%, services 25-30%, goods 20-25%), any signs today that the loss of disposable income was impacting consumer spending in other parts of the economy could rein in some of the more hawkish Fed tightening scenarios. And we know pressure on rents is weighing on the shelter component. Thus, a 0.2% instead of a 0.3% could be the risk on core CPI month-on-month today, which could see short-dated rates edge a little lower and the dollar soften. But a hot PPI print tomorrow and next week’s FOMC should keep the dollar bid on dips.
And the view that the Fed will react to this inflation shock has been central to the dollar’s recovery over the last month. US real interest rates (we look at two-year USD swap rates against the zero-coupon inflation swap) have risen 60bp over the last six weeks. The rise in real rates has pressured last year’s dollar debasement trade, which had assumed that a captured Fed would do the bidding of the White House. The rise in real rates has punished popular debasement trade targets such as gold, bitcoin and the Swiss franc. Keep an eye on key support levels in gold and bitcoin, such as $4100/oz and $60,000 for signs of more money leaving that trade and more money entering the dollar. And a higher USD/CHF looks to be a key vehicle in this debasement retreat. Also noteworthy was the $99bn which flowed into USD-denominated money market funds last week – the highest of the year.
With continued upside risks to energy prices, we expect to see DXY remaining bid on dips. Any soft core CPI reading could see DXY test the 99.50/60 area, but the direction of travel looks to be the 100.40/50 area into next week.
Chris Turner
