Dollar drops as inflation continues to cool; Fed September skip confirmed   

• Dollar falls as Fed rate hike odds soften to 10% for September and 20.2% in November
• US Annual CPI rose from 3.0% in June to 3.2% in July, snapping a streak of 12 consecutive declines
• Core CPI (ex-food/energy) fell to 4.7% year-over-year, lowest reading since October 2021

No surprises from the July CPI report

After a roughly in-line inflation report, Wall Street remained optimistic that the Fed won’t need to raise rates in September.  Headline inflation rose but that was mainly due to the large drop we saw last month from the base effects.  Traders focused on the monthly readings and both headline and core saw gains held steady at 0.2%.  Markets are growing confident that the Fed is done raising rates as risk appetite remains intact as stocks rally and the dollar drops. It doesn’t seem likely that we will see a reacceleration with prices given the weakening labor market and as lending takes a hit.  The so-called super core services inflation gauge posted a 0.19% rise from a flat reading in June, but still well below last year’s half-percentage point pace.

Weekly jobless claims also came in higher than expected, which clearly supports the idea that the labor slowdown continues. The weekly first-time filings for unemployment reading rose from 227,000 to 248,000, while continuing claims edged lower from 1.692 million to 1.684 million.

The Fed will have an easy time at Jackson Hole as there wasn’t anything from both the NFP and CPI report that would move members to tightening in September. The focus for the market will shift to rate cuts becoming aggressively priced in for next year, something the Fed will try to push against.

Economic resilience

A Bank of America report showed household credit and debit card spending turned positive for the first time since March. They now expect a soft landing with no US recession.  The big question for markets is what will be the state of the economy in the fall, and whether resilience could drive a reacceleration with pricing pressures.

EUR/USD

The euro pullback might be over as the risk of more Fed tightening will get pushed back a couple of months.  The recent EUR/USD slide is hovering around a confluence of support that includes the 50- and -100 day SMAs and an uptrend support line that extends back to September 2022.  If bullish momentum emerges, upside targets include the 1.1250 region.  To the downside, 1.0928 provides initial support.

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