US Dollar: Soft CPI risks weigh on outlook – ING

Bank of America’s Chris Turner anticipates US July CPI as the deciding factor for the Federal Reserve’s forthcoming decision. Analysts are anticipating a subdued headline and core readings that align with the 2% goal. A subdued CPI could reduce the likelihood of a September rate hike, steepen the yield curve, and weaken the US Dollar, particularly against procyclical currencies.

The DXY index is currently trading within the 99.40–100.00 range. The US jobs data released on Friday did not have a significant impact on the Dollar. The prevailing assumption suggests that inflation trends will primarily influence the Fed's next move, as evident in today's US July CPI release. Consensus forecasts a moderately subdued set of numbers: 0.1% month-on-month for headline inflation and 0.2% for core.

These figures would bring year-on-year rates to 3.4% and 2.5% respectively, closer to the Fed's 2% inflation objective. Expected contributors to the softer numbers include lower gasoline prices, rental deflation, and muted wage growth. If the market expects a softer price story, a 0.1% month-on-month core inflation reading could be necessary to shift market expectations for a September Fed hike below a 50% probability.

A softer CPI print could push the US Dollar lower, especially against procyclical currencies. There are also rumors that President Trump may propose a reduction in Capital Gains Tax prior to the midterms in early November, which would negatively impact the Dollar from a pro-risk viewpoint. However, the long-term Treasury curve's reaction and whether this could push the Fed towards tightening should be closely monitored. For now, the focus is on whether a soft CPI release can break the DXY from its 99.40-100.00 range.