US Dollar Finds Stability After Initial Post-CPI Weakness

The US Dollar (USD) initially weakened after the release of July's Consumer Price Index (CPI), but quickly reversed its losses and returned to around 100.00 on the dollar index.

This move was largely due to market participants scaling back their expectations for a September Federal Reserve (Fed) interest rate hike, with the US rate market currently pricing in around 9bps of Fed hikes by the September FOMC meeting, down from 12bps prior to the release of the CPI report.

Lee Hardman at MUFG notes that the July CPI matched consensus, with energy driving headline gains while core inflation remains contained. This supports their view that the Fed is likely to leave rates on hold in September.

However, they caution that the lack of clear forward guidance from Fed Chair Kevin Warsh makes it harder to assess how the Fed will set policy going forward, and that the ongoing tensions in the Strait of Hormuz and elevated energy prices continue to pose upside inflation risks in the near-term.