After Tuesday’s -related drop, the US Dollar fell further to reach a two-week low on Wednesday against a basket of foreign currencies. Investors have nearly priced out any chances of a rate hold by the Fed in September. Not only that, but the tame inflation reading has also bolstered expectations of further two later in the year, causing the differential in yield spread between the US and the rest of the G10 bonds to widen. US data will remain in focus with measure of inflation due out on Thursday, before the focus turns to UoM surveys and data on Friday. The is subject to even more volatility in the coming days, before the focus turns to the Jackson Hole symposium next week.
Inflation Stays Tame – For Now At Least
The US dollar index initiated the selling on the back of Tuesday’s consumer inflation data, which landed pretty much where the market had expected, with tariffs still being quietly swallowed up in corporate profit margins rather than passed on to consumers. That gives the Fed room to respond to softer jobs data and, quite possibly, start trimming interest rates from September. That’s what markets are betting on, with speculation about two further cuts also on the ascendency. Trump’s social media bashing of Powell continued yesterday, and this didn’t help the greenback either, further weighing on the US dollar forecast.
In case you missed it, July’s CPI figures were hardly a shocker: was up 0.2% month-on-month and 2.7% , while ticked up 0.3% m/m (). Energy prices slipped by 1.1%, food was flat, and even the sectors most exposed to tariffs saw modest gains. Core goods excluding autos rose a modest 0.2% suggesting that companies are continuing to absorb most of the extra costs associated with tariffs.
Markets are now betting that despite higher tariffs, inflation is unlikely to accelerate sharply beyond a temporary rise this autumn. And if the economy cools further, in particular the jobs market, CPI inflation could even slide below the 2% target next year.
How Will the Fed Respond?
Until the Fed’s next meeting we will have one more jobs and inflation report, as well as several other macro releases, to look forward to. But following a weak jobs report and those big revisions in the months prior, and today’s inline CPI, the Fed looks increasingly likely to pull the trigger on a September rate cut, and potentially followed by 25bp trims in both October and December. For the dollar, that could mean a softer profile into year-end — unless other major central banks move even faster to ease. Against this backdrop, the dollar is likely to remain undermined against currencies where central banks are not as dovish as the Fed. This brings into mind the Bank of England, and therefore the pound-dollar currency pair, which could be heading towards 1.40s.
Don’t Forget About PPI and PCE
With CPI out of the way, the focus will turn to the PPI measure of inflation, which is due on Thursday. The is especially significant, as it is closely tied to the Federal Reserve’s preferred inflation measure—the (PCE) index. The index, which excludes volatile food and energy prices, is a critical gauge for assessing underlying inflation trends, and the data from PPI will help inform expectations for the upcoming PCE release later this month. As the PPI often serves as a leading indicator for consumer prices, any significant changes in this report could signal shifts in inflationary pressures, particularly due to the impact of tariffs.
US Retail Sales To Provide a Snapshot of Consumer Health
Friday’s University of Michigan survey of inflation expectations will also be of interest, as it provides a snapshot of how consumers anticipate inflation to evolve in the near future. However, the market is likely to focus more intently on retail sales data, released earlier in the day on Friday. Headline sales are expected at 0.5% m/m vs. +0.6% in the previous month. Core sales are expected to rise 0.3% m/m vs. +0.5% last.
Dollar Index (DXY) Tests Short-Term Trend Line
The dollar index could be heading down to test the July lows near 96.37 if it now breaks the support trend of what looks like a bear flag pattern. This trend line comes in around the 97.60-97.9 area, making it a key technical zone to watch. Below that, 97.00 could be an interim target ahead of new 2025 lows. Resistance is seen at 98.95. This bearish dollar trend will end, at least from a technical viewpoint, should the DXY break above key resistance in the 100.00-100.15 range in the coming weeks.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.
