Fundamental Analysis

US-North Korea Dispute Remains on the Forefront; Dollar Weakens on Inflation

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Rising tensions between North Korea and the United States were once again the theme of the day with only the release of much-awaited inflation figures out of the US managing to divert attention away from developments on that front. Inflation numbers surprised to the downside, leading the dollar to post considerable losses relative to other major currencies within the first minutes of data release.

The all-important July inflation numbers out of the US failed to satisfy dollar bulls' hopes of strongly putting a Fed rate hike later in the year back on the table. In particular, July headline inflation came in at 0.1% month-month in July, falling short of expectations for CPI growth to stand at 0.2% – still this was better than June's 0.0%. On an annual basis, inflation grew by 1.7%, below the 1.8% that was expected but above the 1.6% from the previous month. Core inflation that excludes volatile food and energy items grew at a pace of 0.1% m/m, the same as in June but below the forecasted 0.2%. Year-on-year, the measure remained unchanged relative to June – it stood at 1.7% as expected. Odds of a Fed rate rise during the December meeting currently stand at around 40% according to the CME Group's 30-day Fed Fund futures prices.

In terms of forex market movements, the US currency lost significant ground relative to majors including the yen, sterling and the euro – most notably the latter one – as the news on inflation went public. Interestingly though, it soon after managed to more than make up for its losses relative to the Japanese and British currencies, while it recovered a significant portion of its losses versus the euro as well.

The dollar index, which gauges the greenback against the currencies of six major US trading partners, was last 0.2% down on the day during afternoon European trading hours – it stood at 93.20. It fell to a one-week low of 92.99 a few minutes after the release of inflation figures. Meanwhile, euro/dollar was 0.2% up, just shy of the 1.18 handle, pound/dollar was flat, having earlier hit a three-week low of 1.2939 and dollar/yen was 0.1% down above the 109 level – the pair fell to 108.72 after the data on US CPI, its lowest since April 20.

The US-North Korea spat that allowed safe havens to rally this week continued during today's European session. US President Donald Trump added to the heat by tweeting that "Military solutions are now fully in place,locked and loaded,should North Korea act unwisely. Hopefully Kim Jong Un will find another path!" [sic]. North Korea accused him of driving the Korean Peninsula to the brink of nuclear war. Safe-haven perceived gold rose to a more than two-month high of $1291.99 an ounce during today's trading. It later retreated to last trade slightly below the day's open at $1286.49. The precious metal posted hefty gains in the three preceding days. The Swiss franc, another safe-haven, failed to maintain momentum from earlier days, losing ground relative to the euro and was last broadly flat versus the dollar after dollar/franc fell to a fresh two-week low 0.9582 earlier in the day.

Turning to the oil-linked loonie, it managed to post some gains relative to the greenback despite weakening oil prices. Dollar/loonie was last down 0.3% and below the 1.27 mark after rising to a one-month high of 1.2752 earlier in the day. The pair advanced in the preceding nine out of ten trading days.

Concluding with oil, WTI was last 1.0% down on the day, just above $48 a barrel, while Brent crude was 0.9% down, around $51.40 a barrel.

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