FX Daily: Dollar bears chase totality

Dollar bears anticipate that the upcoming US CPI data will not negatively impact the dollar following a lower-than-expected jobs report on Friday. The prevailing expectation is that inflation trends will primarily influence the Federal Reserve's next move, with the US July CPI release providing insight into this. Consensus anticipates a modest set of numbers, with a 0.1% month-on-month decline in headline inflation and 0.2% in core inflation.

This would bring year-on-year rates closer to the Fed's 2% target. Factors contributing to the softer numbers include lower gasoline prices, rental deflation, and subdued wages. Given the market's expectation of a softer price story, a 0.1% month-on-month read on core inflation could be possible, potentially shifting the probability of a September Fed rate hike away from a 50% chance of no change.

Additionally, a bullish steepening of the yield curve could result in a dollar softening, particularly against procyclical currencies. The US yield curve may face pressure from the fiscal side due to the deteriorating budget deficit caused by tariff rebates. For today, a soft CPI print could potentially break the DXY's 99.40-100.00 range.

Regarding the Euro, the EUR/USD pair is trading in a lackluster fashion, possibly due to unresolved tension in the Gulf, which keeps European natural gas prices above €60/MWh. If the US CPI number comes in softer, EUR/USD may challenge last week's high at 1.1580. In Central and Eastern Europe, geopolitical factors continue to pressure rates.

In Romania, July inflation fell to 8.2% YoY, the lowest level since mid-2025, mainly due to base effects. However, the National Bank of Romania is unlikely to cut rates before early 2027. The CEE region's rates have underperformed core markets this time, possibly due to overestimation of the need for rate hikes. The Brazilian real underperformed due to a sell-side bank downgrade and a new poll showing President Lula leading his rival by 9%. This marks the first day that politics has significantly impacted the real this year.