Dollar Bears Have The Last Word As CPI Disappoints And Confidence Cools

Traders had to endure three distinct waves of event risk from Friday?s economic calendar. Though when all the data was absorbed, a disappointing mix of a weaker core inflation indicator and fading consumer sentiment survey put the dollar on the chopping block. Since the first indicator hit the wires in the US session, the dollar was moving lower.

EURUSD surged off of resistance just above 1.33 on a pretty consistent rally to 1.3375. As the market started dumping dollars, pound traders took advantage of the flows to drive GBPUSD to a double touch on 1.9780 resistance on the back of a 90-point rally. The favorable yield-spread on the carry group kept the greenback relatively well supported. USDCHF widened its congestion band below 1.2470 slightly to a 50-point range. Backed up by a letdown from the BoJ last night, USDJPY was actually moving higher through the data flow. The pair climbed another 75 points from overnight support to a new four-year high 123.65.
The dollar faltered from its gradual advance this week as data failed to back up growing speculation that the Fed will defer a rate cut until next year. Any lingering hopes that this morning?s data would salvage the week was immediately quashed when the first indicator hit the wires. The market was well-prepared for an anticlimactic Consumer Price Index read today - the drop in the import measure and the overall disappointing numbers from the factory-level gauge made sure of that. Like yesterday?s PPI, the consumer-level inflation report produced a mildly impressive headline print. Through the month of May, prices rose 0.7 percent, the biggest jump since August of 2005. However, this notable pick up was largely due to a massive 10.5 percent jump in the price of gasoline. A quick glance at the remainder of the component list revealed that there were no other remarkable changes for the month. Consequently, when the energy group and other volatile sub gauges were excluded from the calculation, the core report actually cooled on the year. The annual number decelerated to a 14-month low 2.2 percent gait. In the past, when energy prices plunged and brought the headline number with it, growth and hot core inflation kept the Fed steady. Now, with the economy threatening to contract and core pressures almost at target, it will be interesting to see whether the threat of an energy pass through will be enough to keep rates up.
Though the inflation data unofficially marked the end of the day for traders waiting for a turn, there were was a few more indicators to take note of which came in waves. On the hells of the disappointing inflation report, a few positive indicators took command of the fundamental scene. The Empire Manufacturing survey for June doubled expectations with a one-year high 25.8 print. The breakdown certainly supported forecasts for a rebound in factory activity and inventory rebuilding with strong showings in the new order, shipment, and inventory components. Following up on the manufacturing number, the first quarter current account balance proved a boon for trade conditions. The shortfall over the first three months of the year dropped from the original fourth quarter report with a $193.6 billion. Even more encouraging for market sentiment though was the substantial revision to the previous number, which amounted to a $7.1 billion improvement. However, these modest improvements couldn?t crowd out the bears who found more fuel in a weak industrial production and consumer confidence indicators. The University of Michigan?s sentiment survey for June dropped more than expected to a 10-month low. Beyond a low in history though, waning optimism could highlight the cracks in the foundations of positive growth - consumer spending. Looking ahead to next week, there is little is little on the calendar, so speculation and sentiment could take over.
Though yield hunters and dollar bulls were disappointed by the easing in price growth and the implications it would have for future rate policy, the equities market was rallying on the news. The Nasdaq Composite was leading for the second day in a row with a 1.18 percent rally to 2,630.04 by 15:10 GMT. The S&P 500 wasn?t far behind on a 0.93 percent rise to 1,537.12 while the Dow grew 0.9 percent to 13,675.09. Looking through the top movers list, the broad market advance wasn?t without it standout moves. Bellwether tech firm Intel Corp was running on a 4.2 percent advance to $24.20 after Goldman Sachs sparked investor optimism with an upgrade. In other news the consolidation in the exchange sector goes on. Nymex Holdings, owner of the exchange with the same name, rose 2.9 percent to $143.91 on reports that management was exploring a possible sale to Chicago Mercantile Exchange Holdings, Deutsche Boerse or NYSE Euronext.
The drop in rate expectations today may have finally marked the end of the impressive rally in treasury yields. The ten-year note was only 9/32nds higher at 94-24 by 15:10 GMT as its yield shed 4 basis points to move to 5.182. The thirty-year bond was up 18/32nds at 92-11 with its yield also losing 4 basis points to 5.261.