US Dollar Softens as Inflation Cools
The US dollar has softened against its major peers, particularly the euro, as recent data shows a cooling of inflation. According to the latest Consumer Price Index (CPI) report, inflation in the US is subsiding, which has reinforced expectations of upcoming interest rate cuts by the Federal Reserve.
In July, the CPI rose moderately, with the annual increase in inflation slowing to below 3% for the first time since early 2021. This suggests a potential rate cut next month, although it may be less aggressive than previously anticipated by the markets. The data follows a slight increase in producer prices, further indicating that inflation is trending downward. This trend could provide the Federal Reserve with the opportunity to focus more on the labor market amid concerns of a potential economic slowdown.
Amo Sahota, director of Klarity FX in San Francisco, noted that "it mildly shrank the expectations of targeting a 50-basis point rate cut in September," reflecting a more cautious approach towards inflation data.
Euro Reaches New High Against Dollar
As the dollar weakens, the euro has risen by 0.18% to trade at $1.1014, reaching its strongest level since January 2nd. The dollar index also saw a slight decrease to 102.57. Prior to the release of producer price data, traders had widely anticipated a rate cut in September, with bets for a 50 basis-point cut increasing to 56% from 53%, according to CME Group's FedWatch Tool. Sahota believes the Fed is still on track for three 25 bps cuts this year, rather than a total of 100 bps by year-end.
Sterling and Kiwi Dollar See Declines
While the euro benefitted from the weaker dollar, the British pound sterling did not, dropping by 0.29% to $1.2825. This decline followed data showing that British consumer price inflation rose less than expected in July. The pound did, however, soften against the euro, which increased by 0.47% to 85.87 pence. Markets have now priced in a 44% chance of a quarter-point Bank of England (BoE) rate cut in September, up from 36% before the data was released.
The New Zealand dollar also experienced a decline, falling by 1.28% to 0.5999. This drop came after the Reserve Bank of New Zealand unexpectedly reduced the cash rate by a quarter-point, marking its first easing since early 2020 and occurring a year earlier than projections.
Yen Remains Stable Amid Political Changes
In Japan, political developments had little impact on the currency markets. Despite Japanese Prime Minister Fumio Kishida's decision not to run for re-election in his party's leadership race, the yen remained stable, trading at 147.26 against the dollar. FX strategist Vassili Serebriakov of UBS remarked, "The Fed is cutting rates. That should be dollar negative. The currency that's probably still likely to do the best against the dollar is the yen." The Bank of Japan's decision to raise rates is also contributing to the narrowing of rate differentials.
