Headlines

*Dollar resumes relentless rise as inflation stokes Fed bets

*Lowest jobless rate since 1974 sends RBA rate bets soaring

*US treasury curve most inverted since 2000, signals rising recession risk

*EU cuts Euro-area GDP forecast, sees 7.6% inflation

USD again hit another cycle high, this time a couple of pips higher at 108.58. But the greenback pulled back after the upside surprise in the US CPI, closing at 108.02. EUR/USD broke parity and grabbed all the headlines, though it then reversed rallying over a big figure at one point before finishing at 1.0052. GBP printed a “doji” candle having pushed up above 1.1933 and then closing below. USD/JPY has broken north to new highs at 138.48 this morning after consolidating yesterday amid choppy price action. AUD is the best performing major after the jobs data but is mildly softer on the day. USD/CAD fell sharply after the shock 100bp rate hike but trades around 1.30 this morning.

US equities initially slipped in response to the latest inflation data but clawed back their losses later in the day. The S&P500 closed down 0.45% and the Nasdaq was softer by 0.14%. Asian stocks are mixed with Chinese blue chips in the green a day after June exports rose at the fastest pace in five months. China Q2 GDP and activity data are released Friday.  US futures are rangebound overnight and signal a mixed open.

Event takeaway – 77% chance of a 100bp July Fed rate hike!

The biggest risk event on the calendar didn’t disappoint. A year ago, “team transitory” was citing various inflation measures that suggested price pressures were still under control. “These metrics now look terrifying”, one esteemed analyst said this morning. It’s the fact that sticky inflation is the highest in three decades. And the transitory shock is broad-based across prices in the economy.

This is the last thing the Fed wants to see, and markets are pricing in over an 77% chance of a 100bp rate hike in July, from 0% a week ago. The onus is on policymakers to hit the brakes on demand fast via higher rates. But by delaying their response and now having to move faster and deeper into restrictive territory, there is clearly the fear of a recession sooner. This is what the yield curve is signalling by being so inverted. Of course this inflation spike will ease, but the Fed still ahs work to do.

Chart of the Day – Fresh high in USD/JPY

The yen is the weakest G-10 currency on the board today and made a new 24-year high in the major. We’ve had familiar jawboning this morning which is having little effect. But the Bank of Japan is not expected to act on rates or its yield curve control target any time soon.

Instead, the US CPI data has seen an upside break in USD/JPY. Yesterday’s high at 137.86 has been taken out with highs of 138.65 this morning. It’s only big figures left now so 139 and 140. Support is 137.86/75 with the longer-term level at 135.16.