Inflation spooks markets, boosts dollar, ahead of Powell’s testimony

The dollar is holding onto its gains related to strong US inflation and a soft bond auction. Fed Chair Powell is set to comment on recent developments. After the RBNZ sent the kiwi higher on taper talk, the BOC is set to follow. The Delta covid variant and US infrastructure talks are also eyed. Cryptos are falling on China’s crackdown.

US inflation continues rising: The headline Consumer Price Index shot up to 5.4% and Core CPI to 4.5%, both above expectations. The greenback responded positively but later retreated as the details revealed that reopening-related components such as prices of used vehicles, car rentals, airfares and similar items were the primary drivers.

The dollar received a second boost after investors showed little appetite to buy 30-year Treasury bonds in an auction, boosting yields. The 10-year benchmark tops 1.40%. US Producer Prices are due out later in the day.

Jerome Powell, Chair of the Federal Reserve, will testify later on Capitol Hill and could provide more insights about the bank’s intentions to taper down in a bond-buying scheme amid rising inflation. His colleagues said the economy still hasn’t made “substantial further progress” – referring to the labor market ~ toward its goals.

Congress: While a bipartisan group of lawmakers agreed on spending on an infrastructure bill, they are still working on how to fund it. In parallel, Democrats are discussing going it alone.

The Reserve Bank of New Zealand surprised markets by halting its purchase scheme next week, a more hawkish outcome than expected. Analysts expect the RBNZ to hike interest rates as early as August. NZD/USD shot higher and recaptured the 0.70 level.

The Bank of Canada is also set to announce a reduction to its C$3 billion/week bond-buying program, yet the new levels are unclear. USD/CAD is hovering around 1.25. WTI Crude Oil has stabilized around $75.

EUR/USD is capped under 1.18 after the dollar storm and as Europe is grappling with growing coronavirus cases. Vaccination rates have risen in France following guidance that it would be mandatory for certain activities. Spain, the Netherlands, and Portugal have suffered the highest incidence rate in recent days.

GBP/USD is hovering above 1.38, weathering some of the dollar strength as the UK is getting ready to reopen on July 19 despite elevated levels of infections.

AUD/USD is pressured by Sydney’s decision to extend its lockdown as covid continues spreading in Australia’s largest city.

Cryptocurrencies are on the back foot with Bitcoin dipping under $32,000 and Ethereum tumbling below $1,900 after the Anhui province joined others by banning mining of digital assets.

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