Dollar Collapses, Stocks And Gold Shine after Inflation Data

The comments below are an edited and abridged synopsis of an article by XM Group

A recent US inflation report caused shockwaves as investors reassessed the path for interest rates. Annual inflation as measured by the CPI clocked in at 3% in June, just a shade lower than the consensus estimate of 3.1%, but a sharp slowdown from 4% in the previous month.

Dollar Collapses, Stocks And Gold Shine after Inflation Data - BullionBuzz - Nick's Top Six
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Core inflation, which strips out energy and food, fell to 4.8% from 5.3% in May, undershooting market estimates of 5%. These numbers say that US inflation is cooling off, although the Fed hasn’t won the war yet, as we are still a long way from the 2% target and tightness in the labour market suggests the rest of the journey might be the most difficult part.

Market reaction was explosive. The biggest casualty was the US dollar, which fell to a new 15-month low against a basket of major currencies. This mirrored a sharp drop in US yields, as traders concluded that July will probably be the Fed’s final rate increase of this cycle.

With rate differentials compressing, it was the yen’s turn to shine. The Bank of Japan may adjust its yield curve control strategy later in July.

Stock markets went into overdrive following the inflation report. The S&P 500 hit its best levels in 15 months, closing just 7.2% away from its record high as the cold inflation report reinforced optimism that the US economy can achieve a soft landing.

The spotlight will now shift to the earnings season. Analysts’ estimates have declined heading into this earnings season, setting the bar so low that corporate America will have an easy time delivering positive earnings. This dynamic might be the next source of power for equity markets.

Gold pierced some key resistance levels to trade above the $1,960 level recently. With real US yields and the dollar falling, investors loaded up on bullion, which is now less than 6% away from record highs. The next barrier on the upside is the $1,970—$1,975 region, which has acted both as support and resistance this year.

The Bank of Canada raised interest rates yet again, but the reaction in the FX market was minimal as it didn’t signal that more hikes are coming. In China, disappointing trade numbers passed almost unnoticed.