US FX WRAP: Dollar mixed as participants weigh softer-than-expected monthy core CPI figure vs US-Iran conflict heating up

Dollar performance was mixed against major peers following a series of inflation figures across multiple economies. In the US, inflation was somewhat welcomed, with the core monthly figure slightly softer than expected, headline M/M in line, and the yearly figures printed in line. The report had little influence on money market pricing and will likely ease any further hawkish shift for now from Fed officials, but some may be concerned about elevated services inflation. PPI on Thursday could resume the transition to a more hawkish policy view from the FOMC next week if it comes in hot and shifts PCE expectations. Across other countries (Japan, China, Norway), inflation figures tilted above expectations, signalling the upside pressure the Middle East conflict is having on inflation despite the oil decline in late May. Progress between the US and Iran has stalled as strikes between the two have resumed after the Iranians downed a US helicopter earlier in the week. Trump has cited the attack on the US helicopter and Iran taking too long to negotiate a deal behind his decision to hit Iran very hard at some point today. The Iranians have repeatedly said that any aggression will be responded to in the most severe and decisive manner. After the US close, attention will be on the AI trade, with Oracle set to report earnings, giving a glimpse of the AI buildout story. Attention stays on the geopolitical front for any escalation in any attacks, namely, whether it shifts towards energy facilities or senior officials.

CAD and EUR were flattish against the buck on Wednesday, GBP and JPY were marginally weaker, and AUD lagged. For CAD, the expected BoC decision to hold rates at 2.25% had little bearing on price action. The release and accompanying remarks from Macklem/Rogers were rinse and repeat from April, with current policy appropriate for a patient approach in a soft labour market environment, combined with a clouded inflation outlook, which poses risks of becoming persistent. BoC money market pricing was little changed in the aftermath, currently pricing ~37bps of tightening by year-end.

For EUR, the main event is on Thursday, where the ECB is expected to hike by 25bps, taking the Deposit Rate to 2.25%, justified by the assessment that the ECB is past the March baseline and is closer to the adverse scenario. Attention will also be on language regarding a July move. Click here for the EBC Newsquawk Preview.