United States Dollar Index trades calmly ahead of US Inflation data

The US Dollar (USD) is experiencing a steady performance as traders await the release of US Consumer Price Index (CPI) data. The DXY, which measures the Greenback's value against six major currencies, is currently trading at 99.85. Strategists at Brown Brothers Harriman (BBH) indicate that "markets are in a holding pattern ahead of today's critical US July CPI report."

The release is expected to significantly impact Fed funds rate expectations, influencing rates, currencies, and broader risk sentiment. BBH notes that Fed funds futures now assign "50% odds of a 25bps hike in September to a target range of 3.75-4.00%," down from a 75% probability at the end of July. They expect US July CPI to rise modestly but not signal a renewed inflation surge, with headline CPI forecast to increase by 0.1% month-over-month (m/m) and 3.4% year-over-year (y/y), while core CPI is anticipated to rise by 0.2% m/m and 2.5% y/y.

A soft US CPI could bolster arguments for a dovish Fed, weakening the USD and lifting risk assets. Conversely, a robust CPI may result in a USD bounce due to higher front-end yields. However, BBH cautions that with Fed policy already restrictive, there is limited scope for a notable hawkish shift, potentially hurting the USD.