This week’s main risk event lived up to its billing as data showed US consumer prices in June rose by the most in 13 years. The annual rate of inflation is now running just below the 2008 oil spike at 5.6% and the core rate is now at 4.5% which it was last at in November 1991! Year-on-year comparisons will soon fade with the annual rates edging lower, but they are expected to remain well above the Fed’s 2% flexible target.

Tough spot for Chair Powell

And right on cue, the market gets to hear from Jerome Powell later today at his semi-annual testimony in front of Congress. Any views on the rising price pressures and possible tightening of monetary policy will be seized upon. Powell has repeatedly stated that higher inflation is transitory but the strong run of month-on-month prints makes it very difficult for the Fed to stick to this message. How sticky does the Fed expect inflation will be? The market is demanding answers with hints of tapering now expected and the Fed potentially having to bring forward its 2023 rate hike scenario.

Dollar benefits, Euro sinks

The greenback benefitted the most from the bumper CPI print as bonds yields moved above 1.40% on the 10-year US Treasury. The dollar index (DXY) recorded the strongest close since early April and tested the recent high at 92.85. This is the final major hurdle ahead of the year-to-date high at 93.44.

The technical picture for EUR/USD is more or less similar as the 1.1776 close, which was actually below the recent low of 1.1782 brings the year-to-date low of 1.1704 firmly on the radar.

UK CPI higher

The single currency also lost out against GBP as well. EUR/GBP closed at 0.8525 which is the softest since April. We had stronger-than-expected inflation data out of the UK this morning with CPI  jumping to the highest level since 2018. This has pushed EUR/GBP lower again and is now targeting the year-to-date low at 0.8472, after breaking out of its range which we highlighted at the start of the week.

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