Dollar Bounces Back to 100 as Market Scales Back Rate Hike Expectations

The US dollar initially weakened after the release of the July CPI report but quickly reversed its losses and returned to around 100.00. This move suggests that the market is not surprised by the report's findings, with energy driving headline gains and core inflation remaining contained.

According to MUFG's Lee Hardman, the US dollar has proven resilient even as market participants have scaled back Fed rate hike expectations. The rate market currently prices in around 9bps of Fed hikes by the September FOMC meeting, down from around 12bps prior to the release of the CPI report.

MUFG expects the Fed to leave rates on hold in September, with USD stability likely over summer. However, the lack of clear forward guidance from Fed Chair Kevin Warsh makes it harder to assess how they will set policy going forward.