The inflation wheel has turned, hitting the dollar
US consumer inflation slowed to 8.5% in July from 9.1% a month earlier. As we had pointed out, the fact was noticeably lower than the forecasted 8.7%, and this caused an immediate market reaction. FedWatch Tool showed the market's estimate of a 75-point hike in the Fed Funds rate at the end of September fell from 68% to 33%.
The currency market and index futures also saw a momentary reaction. The Dollar Index lost 1% within 15 minutes of publication, confirming its status as the market's most important economic indicator.
The technical picture keeps a close eye on how the day will close. A DXY consolidation below 105.20, where the 50-day moving average and the local August lows are concentrated, could be confirmation of a reversal of a Dollars' bull trend since May 2021. For most of these 14 months, the Fed has been tightening its rhetoric and accelerating rate hikes.
A sharp slowdown in inflation and signs that this move will continue in the coming months set the markets up for a reversal of Fed rhetoric. Right now, a 50-point rate hike is the most likely scenario.
Further prospects are shrouded in uncertainty and tightly linked to inflation data. The Fed may move to a 25-point rate hike in November or December. The key word is "uncertainty" because it determines the degree of market volatility and investor sentiment. We are near the point of a cycle change, which means we are not in danger of a calm market.
Author
Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.
