The US dollar index, a measure of the performance of the greenback versus a basket of other major currencies, remains very close to a two-decade maximum during early Thursday trading. Dollar demand continues to rise, especially after yesterday’s release of US inflation numbers, which came up at 9.1%, reaching the highest level in four decades. The higher-than-expected inflation figures will be seen as a vindication of the Federal Reserve’s hawkish stance, and may even increase the central bank’s drive to halt the rise in consumer prices. With a 75bp rate hike in July already baked into the value of the dollar, the question now is: could the Fed go even further and raise rates by a full percentage point? If this narrative continues to gain traction in the markets then it can be assumed that the dollar’s rally won’t run out of steam before it reaches new multi-decade highs. Against this background, the Euro continues to languish, having briefly fallen below parity with the dollar on Wednesday. The war in Ukraine continues to weigh on the single currency, and may lead to serious energy shortages next winter: a scenario that will be very penalizing for the economic performance of the region and could trigger further euro weakness, which in turn aggravates the inflationary pressure and leaves the ECB in an increasingly difficult situation. The European central bank knows that any action to curb inflation will hurt economic growth, while doing nothing means allowing inflation to rise and more euro weakness. Tough times ahead for the single currency.
Ricardo Evangelista – Senior Analyst, ActivTrades
European shares continue to fall, alongside US futures, as market sentiment remains weighed down after the latest US CPI release. Investors waiting for a positive surprise were left disappointed yesterday following another inflation print showing a fresh 40-year record high at 9.1%. This number isn’t well perceived at all by the market as it paves the way for more monetary tightening from the Fed, especially as the pressure brought by rising prices isn’t showing any sign of a peak or slowdown to come. Traders are now bracing for a complicated summer for riskier assets, even now pricing a 1% rate hike for the upcoming FOMC meeting at the end of the month, while all eyes are already on next year’s likely recession. The US-Dollar is now hovering towards a two-year high while treasury yields edged higher, which doesn’t provide the best set-up for stock markets today as it highlights “fear trading” moves from investors. More volatility may be spotted later in the afternoon with the US initial jobless claims and PPI release, even if no significant changes are expected on these fronts. Most sectors are in the red today, with utilities and real estate shares registering the worst European performances so far. However, the STOXX-50 index is still trading above its major support zone between 3,380 pts and 3,425 pts, as bull traders continue to defend this area.
Pierre Veyret– Technical analyst, ActivTrades
Disclaimer: opinions are personal to the authors and do not reflect the opinions of LeapRate. This is not a trading advice.