The dollar index (DXY00) on Wednesday fell sharply by -1.11% on the dovish CPI report. The dollar’s interest rate differential outlook deteriorated Wednesday as the 2-year T-note yield fell by -5 bp. However, the 10-year T-note yield clawed its way back from an early -5 bp decline to post a +1 bp gain by the end of the day.
T-note yields initially fell sharply on the CPI report but then moved higher later in the day as two Fed officials downplayed the CPI report and indicated that the Fed will continue to raise interest rates.
Chicago Fed President Charles Evans said that inflation remains “unacceptably high” and that he expects “that we will be increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective.”
Meanwhile, Minneapolis Fed President Kashkari said that the Fed “is far away from declaring victory on inflation and that while Wednesday’s CPI report was in the right direction, “it doesn’t change my path” for interest rates. He also said, “The idea that we’re going to start cutting rates early next year, when inflation is very likely going to be well in excess of our target – I just think it’s unrealistic.”
The July CPI report of unchanged m/m and +8.5% y/y was weaker than expectations of +0.2% m/m and +8.7% y/y. The July CPI eased from June’s report of +1.3% m/m and +9.1% y/y. Meanwhile, the July core CPI report of +0.3% m/m and +5.9% y/y was weaker than expectations of +0.5% m/m and +6.1%. The July core CPI report compared favorably with June’s report of +0.7% m/m and +5.9% y/y.
On a year-on-year basis, Wednesday’s July CPI report of +8.7% y/y was down by 0.4 points from June’s 40-year peak of +9.1% y/y. The July core CPI of +5.9% y/y was unchanged from June and was 0.6 points below the 40-year peak of +6.5% y/y posted earlier this year in March.
EUR/USD (^EURUSD) on Wednesday rose by +0.89%, while USD/JPY (^USDJPY) fell -1.60%.
October gold (GCV22) Wednesday closed up +1.80 (+0.10%), and September silver (SIU22) closed up +0.260 (+1.27%). Gold saw support on the dovish CPI report and the decline in short-term U.S. interest rates. Silver saw additional support from hopes for less economic damage from Fed rate hikes.
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