Weak Consumer Inflation Raises Doubts Over Fed Rate Hike

The U.S. Dollar closed lower against a basket of currencies on Friday in reaction to data showing U.S. consumer inflation rose less than expected in July. The low inflation reading could encourage the U.S. Federal Reserve to pass on a third rate hike this year.

According to the government, the U.S. Consumer Price Index inched up 0.1 percent last month after coming in unchanged in June. Economists were looking for the CPI to rise 0.2 percent in July.

Combined with Thursday’s weaker-than-expected U.S. Producer Price Index data, there is no clear reason for the Fed to raise rates at its September meeting and the odds of a rate hike in December is now under 50 percent.

The CPI data and flight-to-safety buying helped drive the dollar to a 16-week low against the Japanese Yen, but some of the loss was pared after tensions over North Korea eased a little after Russian Foreign Minister Sergei Lavrov said there was a Russian-Chinese plan to defuse tensions between the United States and North Korea.

The EUR/USD was also boosted by the weak inflation data and a report from Morgan Stanley that raised its forecasts for the single-currency to $1.25 early next year. The GBP/USD also recovered from early session weakness to close higher.

The AUD/USD and NZD/USD also recovered from a steep two-week sell-off to post solid gains. Profit-taking, short-covering contributed to the rally as well as the widening of the interest rate differential between U.S. government bonds and Australian and New Zealand bonds.

Gold

December Comex Gold prices touched a two-month high on Friday as investors continued to react to the tensions between the United States and North Korea. The weaker U.S. Dollar also led to increased demand for dollar-denominated gold. Helping to limit gains was a resurgence in demand for higher risk assets with all three major indexes posting gains after several days of losses.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil closed lower on Friday after the International Energy Agency (IEA) said market rebalancing was taking time due to weak OPEC compliance with output cuts.

“There would be more confidence that re-balancing is here to stay if some producers party to the output agreements were not, just as they are gaining the upper hand, showing signs of weakening their resolve,” the IEA said in its monthly report.

Primarily driving the price action was the news that OPEC’s compliance with the cuts in July had fallen to 75 percent, the lowest since the cuts began in January. The IEA cited weak compliance by Algeria, Iraq and the United Arab Emirates.