Dollar pares losses after hotter-than-expected PPI

• US PPI posts first gain in three months (last month revised to a flat reading)
• Dollar eyes a fourth week of strength
• 10-year Treasury rises 2.9bps to 4.135%; November rate hike odds rise to 26.3%

The dollar pared losses after supplier inflation in July came in mostly hotter-than-expected.  Hold your horses on calls that the Fed is done raising rates.  This was a notable increase for producer prices and that could very well keep the risk of a November Fed rate hike on the table.

The producer-price index (PPI) for final demand rose 0.3% in July from the prior month.  This PPI report suggests stubborn inflation pressures remain in the economy.  Given the recent trends with the economy, expectations for the August readings could rise even further.  The Fed is likely done raising rates, but the data might not support that call over the next month or two.

Following the hot PPI report, the dollar rebounded against the euro and yen.  The British pound remained mostly firmer, still riding momentum from a GDP beat that confirmed the BOE has a lot more rate hiking to do.

This PPI report also showed some downward revisions with the monthly final demand figures. Overall, the strength in July pricing pressures came from the service sector.  Service costs posted the biggest gain in almost a year.  The August report will probably won’t be cool, so we might see markets fret over back-to-back monthly increases.  Producers will pass these costs onto the consumer, so we might here a lot about inflation being sticky as we close out the summer.

EUR/USD – lower lows eyed as dollar gains for a fourth week

EUR/USD earlier in the week was making a strong move higher, but that stalled at the 1.1060 level, following knee-jerk reaction to the soft US inflation report.  Much of that rise triggered some technical buying that ultimately quickly evaporated.  Given seasonality and the rising fear of a reacceleration with pricing pressures, the dollar might remain bid here.

From a technical perspective, EUR/USD downward momentum could target 1.0825 on a daily close of the 1.0912 August low.  Given summer trading conditions, if the macro drivers don’t support a stronger dollar, price could continue to pivot around the 1.10 level.

If we see broader signs of economic moderation, the bullish case for the euro could be revived, but that will need a confluence of data points to confirm that the Fed is done.

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