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Weekly FX Commentary June 16, 2021: USD edges up amid increased inflation

USD edges up amid increased inflation

Several key inflation figures were announced last week. China’s May inflation rate came in lower than expected on Wednesday (1.3% YoY; vs consensus: 1.6%; previous: 0.9%). By contrast, inflation readings in the US, announced on Thursday, increased at a faster rate than the market anticipated, with US headline inflation at 5.0% YoY (vs consensus: 4.7%; previous: 4.2%) and US core inflation at 3.8% YoY (vs consensus: 3.4%; previous: 3.0%). As a result, the USD appreciated against major currencies (+0.5% vs EUR; +0.4% vs JPY; +0.2% vs RMB since Thursday) as market expectations of Fed tapering increased.

Nonetheless, we believe the US dollar remains in a long-term bearish trend due to several structural reasons (full explanation here), making Forex hedging highly relevant for USD or HKD-based companies buying goods from China or Europe and looking to secure their profit margin against currency fluctuations.

The week ahead

The most important event to come will be the US Federal Reserve’s policy meeting later today. Any sign showing the Fed is starting to consider tapering its bond purchasing program or raising short-term rates in the post-meeting comments would likely support the USD.

In addition, final inflation figures for May in the Eurozone (consensus: 2.0% YoY; previous: 1.6%) and US initial jobless claims (consensus: 359k; previous: 376k) will be announced tomorrow. A continued decline in new claims for unemployment benefits in the US would increase pressure on the Fed to start tapering sooner rather than later.