Blockbuster CPI lifts US dollar

US dollar rallies on US inflation data

The title says it all as much higher than expected US inflation data saw tapering sentiment rise sharply, pushing the US dollar higher across the board. That sentiment saw the overnight US 30-year bond auction underwhelm but overall, the reaction of US bond yields to the inflation data would have disappointed inflation vigilantes.

The dollar index rose 0.60% to 92.77, with some long-covering in Asia pushing it slightly lower to 92.72 today. The index now lies just below resistance, and a small gap on the charts, at 92.85. A daily close above 92.90 sets up a retest of 93.50 by the end of the week. That likely requires Chairman Powell to play the game, though.

Benign French and German inflation data and massively higher US inflation data saw the euro torpedoed by monetary policy divergence expectations. EUR/USD tumbled by 0.70% to 1.1775, near its overnight low and where it remains today. The single currency is now in danger of retesting 1.1700, setting up further losses to below 1.1600. Resistance is now distant at 1.1900. GBP/USD fell in sympathy by 0.50% to 1.3820, just above support at 1.3800. It remains enclosed in a 1.3700 to 1.3900 range between its 100 and 200-day moving averages. I am waiting for a break of either to signal its next directional move.

NZD/USD has held onto its 1.0% gain post-RBNZ this morning as the mighty Kiwi rests at 0.7020. In the broader picture, NZD/USD needs to break either 0.6900 or 0.7100 to signal its next directional move. I still need to remit NZD to pay the landscape gardeners; that’s as good a signal that kiwi is going higher than my readers need.

In Asia, the US dollar remains near its highs versus the won, ringgit, baht, rupiah and rupee. The first three look most vulnerable to further losses due to a combination of Asia recovery fears or Covid-19 fallout. USD/CNY remains comfortably mid-range between 4.4600 and 4.4900 for now, with the focus falling on regional Asia.

As I have touched on at the start of today’s note, regional Asia is now acutely vulnerable to a change in perceptions about the US tightening cycle. You can actually roll that out across the major currency space tonight as well. The fact that US bonds hardly moved overnight after the US inflation data suggests to me that the US Dollar rally will be short-lived if Mr Powell stays transitional at his testimony tonight, However, if that t-word emerges in the wrong context, the US dollar will rally strongly, and Asian currencies are set to suffer more than most.

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