US Dollar: Soft CPI risks weigh on outlook – ING

ING’s Chris Turner expects US July CPI to be the key driver for the Federal Reserve’s next move, with consensus looking for subdued headline and core readings that edge closer to the 2% target. A soft print could reduce September hike odds, steepen the US yield curve and weaken the Dollar, especially versus procyclical currencies, while DXY’s 99.40–100.00 range is in focus.

Fed expectations hinge on CPI data

"Friday's soft US jobs data did not weigh heavily on the dollar. The prevailing view here is that inflation trends will primarily drive the next Fed move. These are on show today in the form of the US July CPI release."

"Here, consensus is looking for a reasonably subdued set of numbers: 0.1% month-on-month for headline and 0.2% for core. These would see the year-on-year rates drop to 3.4% and 2.5% respectively – inching closer to the Fed's 2% inflation target. Driving the softer numbers are expected to be lower gasoline prices, broadening signs of rental deflation and soft wages."

"Given the market looks to be expecting a softer price story today, we would probably need to see a 0.1% month-on-month read on core inflation – which some think is possible. A soft number should drag market pricing of a September Fed rate hike away from a 50% probability in favour of no change. And a bullish steepening of the yield curve should see the dollar soften – particularly against the procyclical currencies."

"Additionally, talk is emerging that President Trump could be trying to launch a cut in the Capital Gains Tax ahead of the midterms in early November. That would prove a mild dollar negative from a pro-risk perspective, but again we should monitor how the long-end of the Treasury curve would take more unfunded tax cuts and also whether this could tip the Fed over the edge into tightening."

"For today, let's see whether a soft CPI print can break DXY to the downside from its 99.40-100.00 trading range."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)