Other than that, it was a day of digesting and scaling back the recent rise in hawkish Fed expectations as used-car prices, which has been a good indication for inflation in this inflation cycle, fell 4.2% in June, the largest drop since the beginning of the pandemic. The prices came down by more than 10% in a year. Plus, according to the New York Fed's latest survey, inflation expectations for the next 12-month fell to 3.8% in June, from 4.1% printed a month earlier, although the 3-year expectations ticked higher to 3%. The same survey also showed that consumers were more pessimistic about the job market outlook, and median expected spending growth over the next year declined to the lowest levels since September 2021.
Capital flew into treasuries yesterday, the US 2-year yield for example declined about 10bp, while the US dollar plunged below a long-term ascending channel base despite the hawkish Fed expectations. The dollar bears are now targeting the 100 level as their next destination.
The dollar-yen plunged below the 141 level and is preparing to test the 50-DMA, which stands near the 140 level, to the downside. The EURUSD rallied past 1.10 mark despite a sentiment index that showed a faster deterioration for July in Eurozone. Today the German CPI will likely confirm a latest rebound in inflation – as the low-price train tickets that government had distributed last year are creating a positive base effect for inflation in Germany, and the ZEW index is expected to warn of worsening mood. Higher German inflation is positive for the euro, but I am not sure that Christine Lagarde or her colleagues at the European Central Bank (ECB) care much about sentiment indicators. The softening US dollar despite the hawkish Fed expectations, and hawkish ECB expectations could support a further rise in the EURUSD toward the 1.12 mark.
