Markets
The US Treasury curve bull steepened for a second session straight. Markets mirrored Tuesday’s post-CPI reaction after a more benign June PPI report. Headline producer price inflation fell by 0.3% M/M and slowed from 6% Y/Y to 5.5%. Core PPI rose by 0.2% M/M and ticked up from 4.6% Y/Y to 4.7%. Both were below consensus and further squeezed July rate hike bets towards 0%. Recall that they temporary hit 50% at the start of the week. Fed governor Cook stated that upside inflation risks are the priority now with all indicators pointing to a stable labour market. She’s prepared to act in absence of disinflation signs (soon). Deprived of interest rate support, the dollar lost some more ground with EUR/USD closing at 1.1463 from a start at 1.1420. Clearing 1.1481/1.15 would make the short term technical picture again more neutral instead of USD-positive. Today’s eco calendar contains US retail sales and more Fed speeches, but their market-moving potential is low after the past two days’ repositioning. US President Trump holds a primetime address to the nation which serves as a wildcard for trading. He is expected to focus on elections and voting machines, but is notorious for going off-script and tackling a wider variety of topics. Energy prices remain elevated as the US keeps launching Iranian strikes.
Sterling had a good run yesterday. EUR/GBP fell below the 0.85 big figure for the first time since June last year and tested 0.8468 technical support (62% retracement on Dec24-Nov25 move). Losing that marker leaves little intermediate support towards full retracement (0.8223). At best, we’re looking at 0.8372 (76% retracement) and 0.8330 (final target of multiple top formation with neckline at 0.86). Cable (GBP/USD) cleared the 1.34 mark and rallied to its best close (1.3540) since early May. Markets took comfort from an FT article indicating that incoming UK PM Burnham selected current Home Secretary Mahmood as next Chancellor. Mahmood is seen as more orthodox than Ed Miliband, Labour’s left favorite to fill the job. With little capacity for expansionary fiscal policy, market focus will now be on delivering in the Autumn budget. On the UK data front, monthly labour market numbers and inflation figures are scheduled for next week. They’ll help shape expectations for the Bank of England’s reaction function. UK money markets currently discount a rate hike by the November meeting. BoE governor Bailey in a speech earlier this week kept a more balanced approach (than some of his colleagues), prioritizing supporting growth over an activist monetary policy response given inflation risks.
News & Views
South Korea’s central bank raised interest rates from 2.5% to 2.75% today. The first hike in three years caps an increasingly hawkish rhetoric over the last couple of months and won’t be the last. Governor Shin Hyun Song just last week before parliament warned rates would have to be raised at an appropriate time. Above-target inflation, an AI/semiconductor led economic boom, a weak exchange rate and increasing financial stability risks have eventually culminated in today’s move. “It is judged that it will be necessary to continue a policy stance consistent with further rate hikes, and the Board will determine the timing and pace of further increases in the Base Rate while assessing the extent of inflationary pressure, the improvement trend in the domestic economy, and financial stability,” the statement reads. The South Korean won benefits from the strong language and appreciates to the best levels since mid-May around USD/KRW 1480.6.
The US administration slaps Brazil with a 25% tariff levy, effective July 22. The import tariffs won’t affect US imports of coffee, beef and certain ethanol products. They are the result of an investigation pursued under Section 301 of the Trade Act of 1974 which “found a number of Brazil’s practices to be unreasonable and discriminatory, restricting the competitive position of American farmers, workers, innovators, and exporters.” The US is Brazil’s second-largest trading partner and one of the few major economies with which it runs a trade deficit. US President Trump last year imposed 50% tariffs on a wide range of products to pressure Brazilian authorities over the prosecution of former President Bolsonaro. Most of them were rolled back following negotiations between current president Lula and Trump. New presidential elections are due in October with Lula’s main challenger being the son of Bolsonaro.
