Dollar Surges Again, Commodities Plunge

Rate hikes and rate cuts

Following the release of the US Consumer Price Index, which showed that prices rose by a significantly worse 9.1% yearly in June than anticipated (8.8%), the US dollar ended the day slightly weaker. The core figure came in at 5.9%, down from the previous 6% but higher than the projected 5.8%, indicating that pricing pressures are still very much present.

The market is now pricing in an 83% probability of a 100 bps hike at the FOMC meeting in 2 weeks, up from 0% a week ago. On the other hand, investors also anticipate one rate cut in Q1 2023. 

The initial reaction in the markets was risk-averse. However, that quickly changed, and sentiment improved. But Thursday brought another risk-off wave, pushing down stocks, commodities and supporting the US dollar.

As of writing, gold and silver are down more than 1%, erasing yesterday’s gains, and copper is nearly 2% weaker, falling toward 3.2 USD.

On Wednesday, the Bank of Canada increased its policy rate by 100 basis points to 2.5%, against the market’s forecast for a rate increase of 75 basis points. The BOC recognized in its policy statement that, since the spring of last year, it has mostly underestimated inflation due to external factors. As a result, the Canadian dollar strengthened initially but gave up all gains today amid the US dollar rally.

More inflation data are coming

Later today, the US PPI numbers for June are due. The market projects the factory inflation to lower from 10.8% to 10.7%, with the monthly change anticipated to be unchanged at 0.8%. The core rate will likely slow to 8.1%. However, considering yesterday’s upside surprise, today’s data might also come out hotter than expected.

A draft of the projections obtained by Bloomberg indicates that the European Commission will significantly lower its GDP forecast for 2022 and 2023 due to the conflict in Ukraine, rising prices, and the possibility of energy shortages this winter. The European Commission is expected to release new economic forecasts later in the session.