US FX WRAP: Dollar hit on soft US PPI

USD weakened again on softer-than-expected inflation data, leaving expectations for PCE to ease comfortably in May. Similar to CPI, PPI came in beneath expectations on all watched gauges. Core rose 0.2% M/M (exp. 0.4%) while the headline fell 0.3% M/M (exp. +0.3%) due to the energy price plunge that started in May. The DXY reaction was more sustained this time, moving lower throughout the session with money markets just about pricing one 25bps rate hike by year's end. DXY sits near the intraday lows of 100.35 from the earlier weekly high of 101.327.  In other news, Fed's Williams says current policy is well-positioned to bring inflation back to the 2% target, but on policy, didn't have a clear direction about which way interest rates are going or when, even after this week's inflation data. Elsewhere, Fed's Warsh largely reiterated his comments yesterday in front of the House to the Senate today, namely, commitment to the inflation target, whilst describing the labour market as in good shape. Geopolitical developments unsurprisingly had little bearing on FX price action given the changes in the inflation dynamic. Overall, little has changed regarding the Middle East as Trump hints strikes will continue into next week, while Iran continues to respond militarily.

GBP notably outperformed, seemingly coinciding with growing reports that the likely next UK PM Candidate is expected to name the Home Secretary as Chancellor. iPaper reported that the cabinet is expected to be announced late Monday. Markets believe that Mahmood would be fiscally conservative given her history in the current ministerial role; however, she lacks experience in economic roles. GBP/USD +1.1%, peaking at 1.3558.

USD/CAD traded off USD weakness as opposed to the BoC rate decision. As expected, the central bank held rates at 2.25%. Language tweaks were made in the statement, but the overall message remains, "the current policy rate remains appropriate to sustain the economic recovery and bring inflation back to the 2% target, in line with the MPR projections".  The MPR saw growth forecasts for 2026 revised down, inflation revised up, whilst the opposite happened for 2027. Positively, the BoC said data we have received since April have increased our confidence that the economy is indeed working its way through this period of global upheaval." USD/CAD sits slightly off the 1.40247 lows