USD retreats after PPI-driven gains - Scotiabank

Hot US PPI data yesterday put the brakes on thinking that the Fed will cut interest rates aggressively in the next few months, driving a short, sharp pop in the dollar. But the Dollar Index (DXY) has given back most of the data-driven gains this morning and is trading broadly lower versus the majors, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD gives up some of yesterday's gains made on hot PP data

"The JPY is notable outperformer following the release of stronger than expected Q2 GDP (a solid gain of 1% Q/Q SAAR) with a 0.2% drop in Q1 output revised to a 0.6% gain). July data from China, by contrast, reflected slower retail, industrial and investment activity, suggesting some fall out from tariff uncertainty. Yesterday's unexpectedly large US PPI gains indicated that business margins are increasing, which is perhaps not what would be expected if tariffs were being absorbed."

"That may mean that higher retail prices become more apparent shortly. A pickup in consumer prices in the next few months suggests that CPI inflation is likely to remain above the 2% bogey this year. At a 0.2% M/M clip (the average of the past 12 months) through December, CPI will end the year around 2.4/2.5% Y/Y. Even so, some Fed easing remains likely, according to OIS which continue to price in 23bps of cuts for September. The limited market reaction to the PPI data rather suggests that markets feel the data did not dramatically alter the outlook for easier Fed policy."

"President Trump made his feelings known, stating that inflation was down to a "perfect number". If the Fed does opt to ease amid intense political pressure for lower rates and stubborn inflation, investors may become more concerned that the Fed's inflation anchor is slipping which can only weaken the appeal of the USD. This morning's US data run includes the Empire Survey, advance Retail Sales. Import Prices, IP, Business Inventories and U. Michigan Sentiment. DXY support is 97.60. Gains should remain capped in the low 98 area from here."