DXY Recovers Intra-day Losses Despite Soft US PPI Figures; AUD/USD Gains 0.3%

Key Points

• The DXY pared intra-day losses on Thursday after further US inflation data alluded to price pressures having peaked.
• The index managed to hold above 105.00, with Fed policymakers keen to emphasize the inflation fight isn’t yet won.
• The Aussie and kiwi both performed well amid the broadly risk-on tone to global macro trade.

US Dollar Extends Downside, Sterling Struggles

The Dollar Index (DXY), a trade-weighted basket of USD-major forex pairs, recovered from an intra-day slip on Thursday as US Producer Price Index data echoed Wednesday’s soft Consumer Price Index data by surprising to the downside, thus further bolstering hopes that US price pressures have peaked. The data, which saw headline PPI post a surprise -0.5% MoM decline in July, further solidified expectations for a 50 bps rate hike from the Fed in September, rather than a 75 bps move feared one week ago.

At the time, the data bolstered risk appetite, with risk assets gaining ground across the board, hurting demand for the safe-haven US dollar. However, the DXY was nonetheless able to hold above the 105.00 level and had recovered back to flat by the end of US trade in the 105.20 area. Analysts argued that the buck’s near-term downside prospects are limitted amid 1) continued US economic outperformance versus its major peers and 2) hawkish communications from the Fed that suggests the central bank isn’t yet thinking about taking its foot off of the gas regarding monetary tightening.

EUR/USD was nonetheless able to post a 0.2% gain, with the pair holding ground above 1.0300, despite increased concerns about the disruptive impact of drought conditions on German shipping. Low water levels in Germany’s Rhine river have triggered a surge in freight costs, presenting a fresh challenge to businesses in the region already struggling with the impact of the ongoing energy crisis.

Sterling, meanwhile, dropped by about 0.2% versus the buck on Thursday. Reports this week about how the UK government is planning for organized blackouts this winter seem to have spoked currency traders by acting as a reminder that the UK is not immune to the energy crisis currently being felt most acutely on the other side of the English Channel. Traders also seem to be avoiding placing big sterling bets ahead of the release of Q2 UK GDP figures on Friday which are seen showing that the UK economy shrank 0.3% QoQ.

Risk-sensitive G10 Currencies Gain Ground

Amid strength in commodity prices and the (mostly) risk-on tone to global macro trade, the risk-sensitive Australian and New Zealand dollars performed well on Thursday, gaining in the region of 0.3% against the buck each. Both hit fresh multi-week highs above the respective 0.7100 and 0.6400 levels. The kiwi ignored data on Thursday that showed that house prices in New Zealand fell in July and took the YoY growth rate of prices into negative territory for the first time since 2011.

The decline in the housing market comes with the RBNZ having been aggressively lifting interest rates now for nearly one year, and is expected to worsen as the country’s central bank continues with rate hikes into 2023. The RBNZ is seen hiking interest rates by a further 50 bps to 3.0% next month, before eventually lifting rates to above 4.0% in 2023.

Meanwhile, a continued bounce in long-term US government bond yields to fresh multi-week highs, with traders deeming that recent soft inflation data reduces the risk that the Fed over tightens and sends the US economy into recession, helped give USD/JPY a modest lift.