Here’s the latest as of Tuesday, July 14th.
Crude oil prices continued to rise for a second day as concerns about the stability of the U.S.-Iran ceasefire mounted. Later, the U.S. Bureau of Labor Statistics (BLS) is expected to release the Consumer Price Index (CPI) figures for June. Additionally, Federal Reserve Chairman Kevin Warsh is set to present his semi-annual monetary policy report to the U.S. House of Representatives Financial Services Committee.
U.S. forces have been engaged in attacks for three consecutive days, with reports from Iranian media indicating explosions on the islands of Kish, Qeshm, Abu Musa, and in the port city of Bandar Abbas. Iran retaliated by targeting U.S. military locations in Kuwait, Bahrain, and Jordan, and also attacked two oil supertankers in the Strait of Hormuz. Furthermore, U.S. Central Command announced a blockade of Iranian ports, and President Trump stated that the U.S. would act as the “guardian” of the Strait of Hormuz, proposing a 20% toll for safe passage. West Texas Intermediate prices climbed by nearly 9% on Monday, hovering around $80, with an additional 2.5% increase later in the day.
Regarding the United States dollar (USD), the dollar index closed positively on Monday, benefiting from a cautious market atmosphere. It remained fairly stable, with fluctuations above 101.00. The anticipated annual CPI inflation rate in the U.S. is expected to decrease to 3.8% for June, down from 4.2% in May.
Waller addresses potential short-term rate hikes if core inflation remains high
Federal Reserve President Christopher Waller sounded a bit more hawkish on Monday, reflected in an FXS Speech Tracker score of 7/10, which is above the historical average. He cautioned that persistent hot core inflation could lead to considerations of short-term rate hikes, despite intentions to let core inflation stabilize for several months. This stance has shifted risks towards a tighter monetary policy even as a credible path to reaching 2% inflation is still viewed as possible. With concerns about core inflation, confidence in the real economy, and a desire to avoid past mistakes, this supports the dollar in a risk-adjusted context.
The FXS Fed Sentiment Index rose by 0.84 points to 127.19, reinforcing its hawkish positioning compared to a neutral index of 100. This alignment suggests that policy risks may lean toward tightening if future core inflation data does not show a significant cooling.
The euro/usd pair has seen a drop of about 0.3% on Monday and is now stabilizing below the 1.1400 mark. European Central Bank President Christine Lagarde is scheduled to meet with U.S. Treasury Secretary Scott Bessent later today and will deliver a speech.
GBP/USD has found some stability around 1.3350 after bearish trends on Monday. The Office for National Statistics is expected to release the monthly GDP data for May later this week.
USD/JPY is quietly trading above 162.00 after a rise of about 0.5% on Monday. Japan’s Finance Minister Satsuki Katayama indicated that rapid changes in asset management might prompt a review of the Government Pension Investment Fund (GPIF)’s portfolio.
Reserve Bank of New Zealand chief economist Paul Conway noted that further easing of monetary stimulus may be necessary if inflation driven by unrest in the Middle East continues. The New Zealand dollar/US dollar pair gained momentum on Tuesday, trading around 0.5800, marking an increase of approximately 0.8% for the day.
Gold (XAU/USD), on the other hand, fell nearly 3% on Monday, testing the $4,000 mark. Following a correction, XAU/USD is now trading near $4,030.
Frequently asked questions about inflation
Inflation refers to the increase in prices of a typical basket of goods and services. It is often expressed as a percentage change month-over-month (MoM) and year-over-year (YoY). Core inflation, which excludes more volatile items like food and fuel, is the figure that economists monitor closely, typically targeted by central banks to maintain a manageable level (usually around 2%).
The Consumer Price Index (CPI) tracks the price changes of a basket of goods and services over time, represented as a percentage change MoM and YoY. Core CPI, targeted by central banks, omits volatile food and fuel costs. When core CPI exceeds 2%, interest rates generally rise, and decrease when it falls below that threshold. Consequently, rising inflation often correlates with a stronger currency, while inflation decline tends to weaken it.
Interestingly, a high inflation rate can boost a country’s currency value since central banks typically raise interest rates to combat inflation. This attracts global capital inflows as investors seek beneficial places to invest their money.
Traditionally, gold has been viewed as a safe-haven asset during high inflation periods due to its capacity to hold value. While investors continue to buy gold during significant market volatility, its appeal diminishes when inflation rises. Higher interest rates to counteract inflation increase the opportunity cost of holding gold, making it less attractive as an asset. On the flip side, when inflation decreases, lower interest rates can enhance gold’s investment viability.
