ING: The USD - FJElite

Yesterday's release of softer-than-expected June CPI was welcomed by asset markets across the board. As James Knightley writes, the softening in prices was broad-based and is a vote in the direction of ING's house call that the Fed will not be hiking this summer after all. Yet, as Chair Kevin Warsh and many Fed members will agree, one number does not a new trend make. And another good speech from Chris Waller earlier this week serves as a reminder that the Fed will need to see 'several' soft inflation releases to avoid tightening. That explains why, even though short-dated US rates fell 10bp yesterday, the market still prices 44bp of Fed tightening into next year.

Feeding into the above story today will be the June PPI release and more testimony from Warsh. Remember that components of PPI, such as portfolio management fees, airfares and healthcare, all feed into the Fed's preferred inflation gauge of the core PCE reading. The June reading of core PCE is released on 30 June. Thus, any unwelcome rise in any of those components today could reverse more of yesterday's move in the rates and FX markets.

Overnight also saw some soft Chinese activity data and further escalation in the Gulf. It looks like investors will struggle to price in a benign inflation environment given developments in the energy sector, where both oil and natural gas are on the rise again, while refined products like diesel are surging as Ukraine intensifies its attack on Russian refineries.

While soft US CPI data has taken the sting out of the dollar's upside, it is probably too early to look for a much lower dollar just yet. In this environment, we prefer energy-exporting, high- yield currencies, such as the Norwegian krone, where a 4%+ per annum one-week deposit rate provides reward if volatility drops again in summer markets.

DXY has support at 100.50. We can see that holding while energy prices stay bid.