US CPI in Focus: Soft Print Could Reduce Rate Hike Odds and Weaken Dollar
ING's Chris Turner expects the July US CPI to be a crucial indicator of the Federal Reserve's next move, with consensus pointing towards subdued headline and core readings that inch closer to the 2% target. A soft print could reduce the chances of a September rate hike, steepen the yield curve, and weaken the US Dollar.
The market is expecting a reasonably subdued set of numbers for July CPI: 0.1% month-on-month for headline inflation and 0.2% for core inflation. This would see year-over-year rates drop to 3.4% and 2.5%, respectively, bringing them closer to the Fed's 2% inflation target.
The softer numbers are expected to be driven by lower gasoline prices, broadening signs of rental deflation, and soft wages. If core inflation comes in at a 0.1% month-on-month read, it could drag market pricing of a September rate hike away from a 50% probability towards no change.
A bullish steepening of the yield curve would see the US Dollar soften, particularly against procyclical currencies. Additionally, there is talk of President Trump potentially launching a cut in the Capital Gains Tax ahead of the midterms in early November, which could be a mild dollar negative from a pro-risk perspective.