US Inflation of -0.1% Drops Dollar Exchange Rates

July 13, 2024 - Written by David Woodsmith

STORY LINK US Inflation of -0.1% Drops Dollar Exchange Rates

US CPI in June was expected to be soft, but the readings were even better than estimates.

Taken in context of Fed Chair Powell’s comments this week, a rate cut is now almost certain in September.

Stocks have been higher every day this week and are set for further gains, while the US dollar has dropped to the June lows.

Thursday’s US CPI report had a lot to live up to as US stock markets have been climbing higher all week and the S&P500 closed Wednesday’s session at new all-time highs. With Fed Chair Powell striking a dovish tone in his semi-annual Monetary Policy Report before the Senate Banking Committee, the stage was set for a positive reading to pave the way for a rate cut in September.

The numbers didn’t disappoint - the headline figure actually fell by –0.1% when a 0.1% rise was expected. This took the year-on-year reading to 3.0%, down from 3.3% last month. Stock markets understandably jumped higher, while the US dollar dropped sharply with a –0.76% fall against the pound and a –2% decline versus the Japanese Yen.

Inflation Figures Better than Expected

The CPI report was expected to show solid progress in the fight against inflation. The MoM figure was expected to show prices rose just 0.1% while a YoY reading of 3.1% was expected. These were wide of the mark, however, and inflation slowed much more than expected.

Taken in context of Fed Chair Powell’s comments this week, it now seems very likely the September meeting will introduce the first rate cut. The odds of this have been climbing in recent weeks and now sit at 85%. They could well climb over 90% in the coming weeks, heaping more pressure on the USD. A second cut in December also now looks likely.

“We do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” Powell said on Tuesday, adding, “The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%.”

Thursday’s CPI could certainly be chalked down as “good data.” Inflation is heading quickly in the right direction and it even begs the question of why the Fed are waiting until September and not cutting in July.

Another reason to cut comes from the labor market, which the Fed considers to be back in “balance” according to the Fed. Indeed, it may be causing concern as the unemployment rate has climbed from a trough of 3.4% last year to 4.1%. If it were to weaken further, the Fed could cut regardless of what inflation is doing.

“If we see that the labor market were weakening unexpectedly, which is to say more than what we’ve seen in a material way unexpectedly, then we could also respond to that, because we have a dual mandate and we now see the two mandates more in balance than they were a year ago,” Powell said on Tuesday.

Thankfully, other data out this week shows the labor market is not unravelling rapidly. Unemployment Claims came in well below the consensus estimate of 236K at 222K. It is thought readings of over 250K would spell trouble for the labor market and for the US economy, so there will be no panic, yet.

This week’s data has therefore been ideal for the US stock market and has weighed on the US dollar. The DXY dollar basket has plunged through is 200dma and is back at the June lows. EURUSD -despite all the fallout from the French election – is at multi-week highs near 1.09.

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TAGS: American Dollar Forecasts