The US dollar was boosted by the high CPI data. The headline inflation reading was 5.4%, easily topping the 4.9% consensus estimate and it was a sizeable increase on the 5% posted in May. It is worth noting the core metric jumped from 3.8% to 4.5%, so it was clear that underlying demand is rising, which should bode well for the recovery in the US. Traditionally, high levels of inflation have been tackled by higher interest rates but in the past few months, the US central bank has made it clear they will not be tightening monetary policy anytime soon. That being said, US central bankers have been laying the groundwork for scaling back the stimulus package. Even though it does not look as if the Fed will be changing their policy in the near term, today’s CPI report adds weight to the argument the Fed has taken a step closer to tightening its policy.
Gold is holding up relatively well when you take into account the upward move in the US dollar. Lately, there has been an inverse relationship between the two assets. It speaks to gold’s strength that it is still up on the session despite the rally in the greenback. Historically, gold has been a popular hedge against inflation, so it is likely the US CPI story is why the commodity is in positive territory.
Stock markets in Europe and the US are experiencing low volatility today. Overall, the mood is a little on the positive side but buying appetite is not that strong. The US CPI report was a double-edged sword as it is encouraging to see that demand is rising, but at the same time, there is an argument to be made the US central bank has more of a justification to discuss the prospect of tightening monetary policy. One of the reasons why US indices have been so strong in recent months is because interest rates are almost zero, but it now seems more likely the Fed will lift rates in 12-18 months.
Oil is a touch higher this afternoon as it has pulled back a large portion of the ground that it lost last week. The recent declines were driven on the back of fears about demand prospects and the absence of a production agreement from OPEC+ members. The picture remains uncertain with respect to demand on account of the rising Covid-19 cases, but dealers are buying up WTI and Brent crude oil nonetheless.
