US Dollar: Fed pricing and CPI risks – BBH

Brown Brothers Harriman’s analyst Elias Haddad believes the upcoming July US Consumer Price Index (CPI) release will have a significant impact on the US Dollar and Fed funds expectations. Haddad predicts a modest increase in CPI, with downside risks if the data are softer than expected. A weaker-than-anticipated CPI could potentially lead to a shift in Fed policy towards a more dovish stance, weakening the Dollar and benefiting risk assets.

Conversely, a strong CPI print may result in a short-lived boost for the US Dollar, driven by higher yields. Despite the current restrictive monetary policy, Haddad believes there is limited potential for a significant hawkish adjustment in Fed policy, which would be detrimental to the US Dollar. The July CPI is anticipated to rise by 0.1% month-over-month and 3.4% year-over-year, while core CPI is expected to increase by 0.2% month-over-month and 2.5% year-over-year.

Trimming volatile components of CPI, such as the trimmed mean, median, sticky, and super core, will provide insights into the true inflation trend. Additional CPI reports from the Atlanta and Cleveland Fed are scheduled for release later in the day. In other currency markets, the US Dollar is consolidating recent losses amid soft bond yields and anticipation of the US Nonfarm Payrolls report.

Meanwhile, the Australian Dollar is stable near its highest level since mid-May, awaiting further clues about the Fed's policy direction before making new bets. Gold prices have dropped sharply after a strong US Nonfarm Payrolls report, having briefly touched $4,500. The Japanese Yen, meanwhile, has briefly strengthened after dropping below the 160.00 mark due to a more hawkish BoJ rate hike outlook.