Market wrap: US dollar falls across the board after the CPI data  - Westpac

Analysts at Westpac offered a market wrap.

Key Quotes:

"US consumer prices rose 0.2% in April, led by a jump in gasoline prices, after falling 0.1% in March, but still shy of expectations. Core CPI also rose less than expected too, +0.1% vs consensus +0.2%. The annual core rate held steady at 2.1%, though mainly due to base effects from a soft patch in consumer prices a year ago. If anything, the short term inflation pulse has moderated, the three month annualised core rate at 1.8% in April versus a 3.2% pace as recently as February. Despite an eighteen year low 3.9% unemployment rate, inflation pressures remain in check, keeping the Fed on track for a gradual rate hike path.

The US 10yr treasury yield fell from 2.99% to 2.94% following the CPI data, settling later around 2.96%, while 2yr yields were net unchanged at 2.53%. Fed fund futures yields continued to predict two more rate hikes by year end.

The US dollar fell across the board after the CPI data. EUR/USD rose about 60 pips on the data, later steadying up 0.6% on the day, around 1.1915. USD/JPY briefly touched 110.00 in the London morning but fell as far as 109.32 post-data. USD/CAD fell 0.85c on the day to 1.2770.

Emerging market currencies such as the Russian ruble and South African rand were strongest on the day, as equities bounced and commodities were generally strong. But AUD outperformed all G10 currencies, rising from 0.7460 late Sydney to a NY high of 0.7540, including a 50 pip bounce on the US CPI.

NZD was the day’s underperformer, markets interpreting the RBNZ statement dovishly. It extended the day’s losses to 0.6904 (for a total 80 pip fall post-RBNZ), but later rebounded to 0.6965 as the USD weakened. AUD/NZD extended post RBNZ gains to 1.0825 (for a total reaction of 1.4c), making a three-month high.

As expected, the Bank of England voted (7-2) to leave policy unchanged (usual dissent from Saunders and McCafferty calling for immediate rise to 75bps) in what would be best described as a neutral hold. Markets had been biased for a slightly hawkish bias, but the MPC stated a greater degree of data dependency. The economic projections in the BoE’s Inflation Report were broadly in line with those of February. Though current year growth was lowered to 1.4% (previously 1.8%) and inflation was set to fall more sharply, labour market strength was also noted.

GBP/USD had rallied above 1.3600 into the decision, brushing aside soft UK data, only to slide under 1.3500 on the BoE outcome. Governor Carney said a rate rise this year was likely. Markets price little chance of a 21 June hike but 47% chance by 2 August."