Cheaper gas, wireless plans keep United States inflation in check

Posted July 16, 2017

Dollar dipped against a basket of major currencies on Friday, after weaker-than-forecast data on consumer prices and retail sales in June raised doubts about United States economic growth and whether the Federal Reserve would raise interest rates again in 2017.

Bond prices rallied after the Labor Department said the consumer-price index was unchanged in June from the prior month.

The so-called core CPI, which strips out food and energy costs, edged up 0.1% in June, matching the increase of the two previous months.

Compared to a year ago, overall consumer price inflation is up 1.6%, the smallest gain since October.

Looking ahead, investors are awaiting a host of USA economic indicators, including core inflation, retail sales and industrial production for June later in the session for more insight into how the Fed might proceed.

After the report, which was released simultaneously with retail sales for the same month, the dollar weakened.

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Data out today could, of course, surprise to the upside, but we don't think so - and it is more likely inflation will continue to show a retreat or at best no change - neither result is likely to be supportive of the Dollar.

The benchmark 10-year Treasury yield TMUBMUSD10Y, -2.05% fell 5.1 basis points to 2.296%.

The Australian dollar rose 0.4 percent to $0.7758, well on track to post its best weekly performance in four months.

On Wednesday, U.S. Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee on inflation, the Fed balance sheet and interest rates.

This view is backed up by Hermes Investment Management group chief economist Neil Williams, who believes the Fed remains the test case for whether central banks can ever "normalise" rates.

"It is broadly a USA dollar-negative market as latest comments from Yellen and others suggest that interest rates will rise very gently and that is supportive for high-yielding currencies for now", said Viraj Patel, an FX strategist at ING Bank in London.

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The CPI, in particular, will garner interest because "if you take Yellen at her word the Fed is starting to second guess itself as to whether recent weakness is transitory", said ANZ Bank New Zealand senior economist Phil Borkin.

But Dr Yellen added that monetary policy was not on a preset course, and that the Fed was "watching this very closely and stands ready to adjust our policy if it appears the inflation undershoot appears consistent".

The dollar index fell 0.4 per cent against a basket of currencies, while the euro gained 0.39 per cent to $1.144.

But industrial production rose 0.4%, just above expectations, with May revised up to a slim gain, the Federal Reserve reported. After initially falling below 2.3%, the 10-year yield climbed back above that level, reflecting strong forces that are still pushing up on yields, analysts said. Retail sales rose 2.8 per cent year-on-year in June. The greenback is likely to locate support around the 0.94 region.

Brent crude futures, the worldwide benchmark for oil, were up 31 cents at $48.73 per barrel. Oil prices rose 1 per cent.

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