US inflation hits fresh 40-year high.

US consumer prices increased 1.3% for June with the headline inflation rate strengthening to a fresh 40-year high of 9.1% from 8.6% previously and above consensus forecasts of 8.8%. Energy prices increased 42.6% over the year with a 10.4% increase for food prices.

The underlying rate declined slightly to 5.9% from 6.0%, but was above consensus forecasts of 5.7%. On a monthly basis, there were significant increases in the cost of new vehicles and transportation services.

The stronger than expected data triggered fresh concerns over underlying inflation pressures in the economy and also increased expectations that the Federal Reserve would have to take more aggressive action to curb inflation pressures.

Futures markets fully priced in a 75 basis-point rate hike for July with expectations of a rate above 3.50% at the end of 2022. There was also some significant speculation that the Fed would hike by 100 basis points, especially after the Bank of Canada move.

There were, however, sharp losses in bonds after the inflation data with the 10-year yield increasing to near 3.05% and the dollar posted sharp gains with fresh 23-year highs at 137.85.

There was, however, a sharp reversal later in the session as recession fears increased again and the 10-year yield dipped to near 2.90%.

The dollar jumped after the US CPI data before being hit by a round of profit taking. Overall short-term yields continued to provide net support, especially against the yen and USD/JPY surged to fresh 23-year highs above 138.50 on Thursday.

The Bank of Canada (BoC) announced a 100 basis-point increase in interest rates to 2.50%. This was even larger than consensus expectations a 75 basis-point hike and the sharpest hike since 1978.

The bank expressed increased concerns over inflation and announced that it was aiming to front-load rate hikes in order to lessen the risk that inflation expectations increase. It also expects to increase rates further.

The latest Australian labour-market report recorded a surge in employment of over 88,000 compared with expectations of around 30,000. The unemployment rate also declined sharply to 3.5% from 3.9% and below expectations of 3.8% and the lowest reading for 48 years despite a higher participation rate.

Underlying confidence in the Euro-Zone economy remained weak with further concerns over gas supply and prices. EUR/USD again dipped to test 1.0000 after the US CPI data. There was a sharp reversal as risk appetite recovered and US long-term yields declined. EUR/USD rallied back above 1.0100 before fading again.

The US Beige Book reported that labour availability had improved and demand had eased slightly. Expectations of a weaker US economy was a barrier to further dollar gains. EUR/USD still retreated to 1.0020 on Wednesday amid weak Euro sentiment.

Short-term yield spreads undermined the yen. After a limited setback, USD/JPY posted a fresh 23-year around 138.65 on Thursday.

The Swiss franc maintained a firm tone. EUR/CHF was held around 0.9850 with USD/CHF at 0.9825.

Sterling was influenced primarily by global developments, but with some support from expectations of a more aggressive Bank of England stance. GBP/USD dipped to 1.1830 before rallying to above 1.1900 before dipping again to 1.1860. GBP/EUR rallied to 8-week highs near 1.1900 before a recovery to 0.8450.

The Canadian dollar strengthened after the more aggressive than expected BoC rate hike. USD/CAD dipped to 1.2940 lows before recovering to 1.3000. AUD/USD rallied from 0.6725 lows and traded around 1.1810 on Thursday as the jobs data provided some protection.

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