Dollar lower after US inflation data

Inflation in the US came in a little lower than forecast in July (at 2.7%, unchanged from June) fuelling market expectations for a cut in interest rates at the Fed’s next meeting next month. US stocks rallied to new record highs, US bond yields edged lower, and the dollar weakened. The latter is trading at around $1.17 and $1.3540 vis-à-vis the euro and sterling this morning respectively , in both cases down around three quarters of a cent from Monday’s closing levels, though it still remains off its 2025 to date lows of circa $1.1840 and $1.3790 in early July. Meanwhile, EURGBP has rebounded from yesterday’s early morning low of around £0.8620 to trade at about £0.8650.

Market expectations for a Fed rate cut in September firmed following yesterday’s inflation data, with about 18bps, or a circa 72% chance of a quarter-point reduction, now priced in, and around 55bps in total expected by year-end. US 2-year bond yields finished around 4bps lower on the day, while 10-year yields ended flat. In contrast, German and UK yields nudged higher with curves steepening as 10-year yields rose by 5-6bps (and 30-year yields by a bit more). In equity markets, both the S&P 500 and Nasdaq closed at record highs on the back of gains of more than 1%. European stocks ended broadly flat, though they are playing catch-up with the US this morning (up around 0.6% at the open).

Headline consumer price inflation in the US remained at 2.7% in July (2.8% expected), according  to yesterday’s CPI report, with a decline in energy & food price inflation offsetting an increase in core inflation. The latter rose to 3.1% (3% expected) from 2.9% in June, with core goods inflation accelerating to 1.2% from 0.7% in June (most probably reflecting the impact of increased tariffs) and core services inflation unchanged at 3.6%.

Fed member Schmid says economic growth in the US remains solid and inflation remains above the 2% target, hence monetary policy “should remain modestly restrictive”. However, he also notes that “inflation is determined by the balance of supply and demand, and if I see indications that demand growth is weakening significantly, I will adjust my views accordingly” (and support a cut in interest rates).

ECB’s Nagel says “key interest rates are currently at a very good level (and) from here, we can monitor how the economy develops and react flexibly if necessary.” The market currently sees a less than 50% chance of any rate cut by the end of this year.

It is very quiet on the economic data front today ahead of some important releases tomorrow and Friday, including GDP in the UK (Thursday) and retail sales in the US (Friday).