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US Dollar Shrugs Off Faster Inflation as Markets Chase Risk in Wake of Trump-Kim Summit

- USD pares losses after US headline inflation beats economist forecasts.

- Headline CPI hits 2.8% in May while core CPI remains firm at 2.2%.

- But economists say the data will do little to change views at the Fed. 

© Nazli Sart, Adobe Stock

The US Dollar remained in the red Tuesday even after US consumer prices rose faster than was expected during the month of May, as markets chased so called risk assets higher folliwng a positive meeting between President Donald Trump and North Korea's Kim Jong-Un.

Headline US inflation rose by 0.2% during the month to the end of May, in line with economist expectations, although this pushed the annualised rate of inflation up to 2.8% when markets had looked for it to rise to just 2.7%.

Core inflation, which does not include volatile food and energy components, also increased by 0.2% for the month which pushed up the annual rate of core inflation to 2.2%.

Both of the inflation numbers are above the 2% target of the Federal Reserve yet are seen by economists as doing little to prompt a response from the central bank.

"Overall these figures are in line with expectations and as such shouldn't move markets much today or change the debate for policymakers ahead of the FOMC meeting tomorrow," says Andrew Grantham, an economist at CIBC Capital Markets.

Another economist gave a similarly sanguine reaction to the data, describing US inflation pressures as "contained" and also saying that they will do little to alter the interest rate equation at the Federal Reserve.

"Unfavorable base effects will raise [inflation] a bit further over the summer, but the trend remains contained," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "The Fed's rate hikes for some time yet will be aimed at reducing the perceived threat of future inflation, rather than dealing with an immediate problem."

All the upside in core inflation came from services and not goods during May, with an above-trend 0.4% increase in the price of communications and education services. These gains were offset by a 1.9% fall in airline fares brought about by fierce competition.

The US Dollar index was quoted 0.04% lower at 93.58 during noon trading, after repeated attempts to break into positive territory for the session, while the Euro-to-Dollar rate was seen 0.13% higher at 1.1795. The Pound-to-Dollar rate was 0.02% lower at 1.3368 for the session.

The lack of upside for the Dollar may have been due to economists and markets taking the view that Tuesday's numbers do little to change the status quo at the Federal Reserve. The Fed said in May it was willing to tolerate an inflation "overshoot" for a period of time rather than rushing to raise interest rates at a more rapid clip.

"Recent communication from the Fed has signaled that it is willing to tolerate a modest inflation overshoot in the near-term and thereby stick to their plans for “further gradual” rate hikes," says Lee Hardman, currency analyst at MUFG. "The Fed would likely have to become concerned over the risk of a more persistent inflation overshoot to shift to a more rapid pace of rate hikes."

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