Dollar under pressure after US inflation – USA

Written by Convera's Market Insights team

The consumer price index (CPI) does not move

Boris Kovacevic – Global Macro Strategist

Global markets welcomed yesterday's news that US inflation eased for the fourth month in a row, falling to its lowest level since early 2021. Headline inflation surprised consensus to the downside, coming in at 2.9% annualized and 1.6% three-monthly in July. The only caveat to the CPI report was the unexpected 0.4% monthly increase in housing costs – the largest component of the overall index – as rents are falling more slowly than initially expected.

While the details of the CPI and PPI readings that feed into the Fed's preferred inflation indicator (PCE) and will be released later this month could push the index higher, they are unlikely to halt the expected start of the easing cycle. More broadly, price pressures continue to ease and will give the Federal Reserve (Fed) more confidence to ease policy in upcoming meetings. The question has changed from whether the Fed will cut in September to how much easing is possible. The answer will likely depend on the next jobs report, which has replaced inflation data – which has been the dominant force in the first six months of the year – as the main factor in pricing policy in the second half of 2024.

Overall, this week's inflation numbers did not move the markets or the Fed. US equity benchmarks traded slightly lower following the CPI report, while the US dollar and Treasury yields declined. Falling inflation rates are likely to remain a net negative for the dollar over the next 2-3 months, so it's up to macro data to tip the scales. Today's retail sales report will be the last major release this week. Any signs of increasing recession risks would weaken the dollar. Robust spending would call into question whether 200 basis point cuts over the next seven sessions are really justified.

Pound Sterling weaker after UK consumer price index

George Vessey – Chief Foreign Exchange Strategist

A smaller than expected rise in UK inflation in July has given traders confidence that the Bank of England (BoE) will make further rate cuts. Markets are almost fully pricing in two more 25 basis point rate cuts this year, compared to 44 basis points ahead of the inflation report. Sterling is facing mild selling pressure and has fallen over 50 pips against the Euro as €1.17 proves to be a key short-term resistance level.

The UK consumer price index rose 2.2% in July and is set to rise further as the year-on-year impact of lower household energy prices is no longer as strong. However, this comes as no surprise and was predicted by the BoE. Instead, more attention is turning to services inflation, which recorded its lowest reading in more than two years, coming in at 5.2%, well below the BoE's forecast of 5.6%. Survey data also shows that companies are raising prices much less aggressively than before, and with wage growth also moderating, these conditions should help facilitate at least one rate cut, possibly two more, before the end of the year.

Why didn't GBP/USD fall further yesterday? Although UK yields fell in line with rising rate cut bets, US yields also tumbled after the US CPI hit its lowest since 2021, allowing GBP/USD to stabilize above its 5-year average of $1.28. Attention now turns to UK second-quarter GDP, which was in line with expectations this morning and barely moved the pound, but retail sales figures released tomorrow will provide further evidence of the strength of the consumer and the economy in the third quarter.

Recovered sentiment pushes euro above 1.10 USD

Ruta Prieskienyte – Chief FX Strategist

EUR/USD rose to its highest level in 2024 as the US consumer price index came in lower than expected, boosting hopes of a Fed rate cut in September. However, traders expecting an even lower reading were disappointed as the prospect of a huge 50 basis point Fed rate cut in September becomes increasingly difficult to justify. Despite a rise in US Treasury yields, the euro remained strong, supported by recovering sentiment that favored the pro-cyclical currency.

Domestic macroeconomic data was mixed and largely overlooked by market participants. Final estimates showed France's annual inflation rate rose to 2.3% year-on-year in July, lower than the preliminary estimate suggested. The second estimate of Eurozone GDP was in line with expectations, but employment growth was weaker than expected, indicating potential problems. In addition, industrial production fell 3.9% year-on-year in June, beating expectations for a 2.9% decline. In fact, Eurozone industrial production has contracted year-on-year every single month in 2024. As the manufacturing sector remains weak and shows little sign of recovery, it is likely to weigh on growth in the third quarter of 2024. Consequently, Eurozone growth is likely to rely more heavily on the services sector for now.

The euro index rose over 0.3% on Wednesday, helped by a modest gain against the NZD. EUR/GBP rose as much as 0.3% to £0.858 as UK inflation rose less than expected, fuelling bets from the Bank of England on a near-term rate cut. Meanwhile, EUR/JPY approached a two-week high after news that Japanese Prime Minister Fumio Kishida will not run for a second term.

CHF and JPY suffer heavy losses this week

Table: 7-day currency trends and trading ranges

Major global risk events

Calendar: 12-16 August

All times are in BST

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*Published exchange rates are provided by Convera's Market Insights team for research purposes only. Rates are from a unique source and may not match live exchange rates quoted on other websites. They are not an indication of actual buy/sell rates or a financial offer.