The US dollar has risen sharply. Expect the British pound to falThe dollar remains well-valued after yesterday's US data further buoyed US yields and reinforced calls for a 25-point hike from the Federal Reserve in July. The economy grew at a revised 2% quarterly rate and initial claims fell sharply again, giving markets the impression that the Fed still has work to do.
Dollar strength was evident yesterday across all sectors. The main hot spot is still USD/JPY. It looks like the Bank of Japan is ready to intervene above the 145 level - just like they did last September. Back today. The May core PCE deflator is expected to remain steady at 0.3% to 0.4% from the previous month, consistent with the Fed's view that core inflation is not falling fast enough. This will keep the US dollar exchange rate stable.
EUR: Eurozone CPI may provide some support. Following the release of European inflation data in recent days, the euro zone core inflation rate in June is expected to have come in at 5.5% year-on-year, compared with 5.3% in May. This data could push the market to price a 25 basis point increase from the European Central Bank in July and September. Currently, the market is only pricing in a combined increase of 37 basis points in these two meetings . The ECB offers the euro some protection against a very aggressive Fed, even as the two-year EUR/USD spread widens further to 120 points in favor of the dollar.
