Weak US inflation triggers new thinking

The US Dollar kicked off the week where it ended the previous one, rallying. Fed Chair Jerome Powell confirmed the gradual path of rate hikes. His speech did not reveal any earth-shattering news but coming after the unimpressive Non-Farm Payrolls report; it provided an excuse to buy the US Dollar. Rising US bond yields also supported the greenback/

Things became complicated when US President Donald Trump announced that the US will abandon the Iran deal, officially known as the JCPOA, and will also impose new sanctions on the Middle Eastern country. Exchanges of fire between Israel and Iran over Syria followed. The typical response would be a strengthening of the Yen, the ultimate safe-haven currency, but the reaction was muted.

The deterioration in the Middle East was countered by further positive developments around North Korea that contributed to a weakening of the Yen. US Secretary of State Mike Pompeo visited Pyongyang and returned with three freed American prisoners. Also, June 12th was set as the date for the Summit between North Korean Leader Kim Jong-un and President Trump in Singapore. The peace process is going on smoothly so far.

The US JOLTs report showed that the jobs market is healthy while the Producer Price Index fell short of expectations but was ignored by markets.

And then came the real Dollar disappointment. US core inflation remained unchanged at 2.1% YoY, falling short of expectations for a rise to 2.2%. Core consumer prices also missed on the monthly measure and also headline inflation did not impress. The publication joined the deceleration in US wage growth. The accumulation of not so great data began weighing on the US Dollar, and it lost some ground across the board. The moves against the Japanese Yen were more limited, but the pair failed to breach the round ¥110.00 level.