US Inflation Quick Analysis: Hawks have lost their prey, US Dollar set to suffer

Markets always want more – and this time they have received what they wished for. Not only has underlying inflation risen by only 0.2% MoM in June, but the yearly figure crashed to 4.8% YoY.  That confirms the disinflationary trend. While the US Dollar could still bounce in a pullback, the direction is clear – down.

The Federal Reserve is set to raise interest rates by 25 bps on July 26, after pausing in June. While the CPI report does not alter this picture – officials are set to reiterate their commitment to further tightening – it diminishes the chances of another increase.

Back in June, the Fed accompanied its no-change decision with an aggressive forecast for two additional rate hikes. The weaker-than-expected Nonfarm Payrolls data on Friday and this inflation report show that the disinflationary forces are taking hold. 

Volatility is high in stocks, Gold and especially foreign exchange. The trend of a weaker US Dollar includes occasional counter-trends, but any upside move in favor of the Greenback will likely serve as a "sell the rally" opportunity. 

As mentioned earlier, Fed officials have time to respond to the data before they enter their "blackout period" – the ten days preceding the rate decision. Any call to refrain from hiking in two weeks would weaken the US Dollar, while a demand to raise rates twice would strengthen it.

I expect Fed members to signal a hike in coming in July without going further – allowing the current market ebb and flow to continue. That means a risk-on mood. Volatility is unlikely to settle anytime soon.