The dollar index was down on Friday and the major currencies were stuck within recent ranges as markets ignored Thursday’s high US inflation, suggesting that the Fed’s stance was likely to be a temporary dip.
US consumer prices rose 5% year-on-year in May, the biggest jump in nearly 13 years. read more Forex markets were sluggish all week in anticipation of the data, but when they turned out to be above expectations, the market reaction was marginal.
The Federal Reserve has repeatedly stated that it expects any rise in inflation to be temporary and that it is too early to discuss reducing its monetary stimulus.
The dollar index declined in the Asian session and at 07:23 GMT fell 0.1% on the day to 89.995. It was on track for a small weekly loss of about 0.2%.
The benchmark 10-year US Treasury actually surged to a three-month high following the CPI as short sellers stopped betting on yields.
“We agree with the Fed that the increased inflationary pressures will be short-lived,” strategists at UBS said in a note to clients.
“The policies of both the Federal Reserve and the European Central Bank are unusually consistent, stressing that tightening will only be needed if inflation becomes more resilient, which they currently consider unlikely.”
There are signs of a slight increase in risk appetite in the foreign exchange markets, with the Aussie up 0.2% to $ 0.7768 and the New Zealand dollar up 0.1% to $ 0.7204.
But the British pound remained stable at $ 1.41695.
The “dovish” position of the ECB at the meeting on Thursday had little effect on the euro, which during the day remained unchanged at $ 1.2181 and showed a slight weekly gain of about 0.1%.
The ECB said it will continue to bail out bonds at a “significantly higher” pace, even as it raised its growth and inflation forecasts. read more
The EUR / USD implied volatility over the six-month horizon was its lowest since early March 2020, almost back to the levels it was at before the COVID-19 pandemic triggered a spike in volatility.
“The excess liquidity reduces the level of volatility across asset classes and stimulates the search for carries, including at the long end of yield curves,” strategists at ING wrote in a note. When trading currencies, “carry-over” means the profit from owning high-yielding currencies.
“In this situation, the dollar will continue to be softly offered against those currencies with good histories (monetary tightening or commodity positions) and low yields,” ING said.
In Russia, the central bank is expected to raise its 5 percent interest rate by as much as 50 basis points, the third consecutive rate hike. read more
The central bank predicts annual consumer inflation at 4%. It exceeded the target at the end of 2020 amid global inflation and the impact of the weakening ruble on prices.
Elsewhere, Bitcoin recovered slightly, while Ether was tuned for a 10% weekly drop. Both indicators have stabilized this month, but are still trading well below their mid-May peaks.
Now the focus is on next week’s Fed meeting. The central bank will likely announce in August or September a strategy to cut its massive bond buying program, but will not begin to cut monthly purchases until early next year, a Reuters poll of economists showed. read more
Meanwhile, the leaders of the G7 of the richest countries meet on Friday at the English seaside resort of Carbis Bay. read more
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