FX Daily: Benign CPI takes sting out of dollar’s upside
At a Glance
The market reacted to a softer-than-expected US CPI print by pushing the DXY dollar index down by 0.5%, signaling a recalibration of Fed tightening expectations. Per the full note from ING, this release has prompted a 10bp reduction in projected Fed rate increases, reflective of market sentiment that a pause in rate hikes is more plausible. Additionally, various high-yield commodity currencies are poised to benefit from this inflation backdrop. This sentiment comes ahead of today's PPI data and further Federal Reserve commentary, which may reinforce or mitigate the dollar’s current trajectory.
Key Takeaways
Full Analysis
What the desk is arguing
The desk views the recent CPI release as a pivotal moment for the dollar, marking a shift in expectations surrounding Federal Reserve tightening. Per the full note from ING, the central bank is signalling the need for several additional soft inflation prints to justify maintaining the current monetary policy stance.
This shift in market positioning is evident as the expected Fed tightening has diminished, with just 44bp of tightening still priced in until next year. Today’s PPI data will further inform this debate, particularly as its components feed into the core PCE measure that the Fed closely monitors.
Where it sits in our coverage
Currently, for the EUR/USD pair, we have a consensus target of 1.1700 with firms like goldman and deutschebank projecting 1.1800 for March 2026 while citi holds a more conservative outlook at 1.1300. In contrast, for USD/CAD, the consensus target stands at 1.3500 with several firms like scotiabank and mufg placing similar estimates for the same horizon.
This view aligns with the recent downward adjustment seen across many firms but remains distinctly at the upper end of our coverage limits, especially for EUR/USD where citi diverges significantly with 1.1300.
How other firms see it
A mix of firms reflects broad agreement with softer dollar sentiments, with firms like goldman and deutschebank leaning towards a weaker dollar outlook based on inflation trends. In contrast, citi holds a more cautious stance, projecting higher levels for EUR/USD and USD/CAD.
Market participants should also keep an eye on related dynamics, such as the BoC's outlook for USD/CAD and the response of European monetary policy, especially in this evolving inflation narrative.
What the calendar says
A quiet calendar ahead may leave investors reactive to market sentiment, particularly how today's PPI figures are digested by traders before the anticipated core PCE reading at the end of the month.
Market Implications
Traders should pay close attention to the PPI release today and how it might alter the market's view on future Fed actions. A breach below 1.1400 in EUR/USD could signify strengthened bearish momentum for the dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
All 30 desk targets for EUR/USD
From the original
Articles FX Daily: Benign CPI takes sting out of dollar’s upside Published 07:45 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The DXY dollar index sold off 0.5% on yesterday's benign US CPI print and 10bp came out of the expected Fed tightening
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4 itemsFX Daily: Dollar debasement trade in retreat
The desk views the dollar as maintaining its support ahead of a critical US May CPI release, as detailed in the latest research from ING. With real rates having surged by 60 basis points over the past six weeks, market participants are anticipating a likely December Fed rate hike contingent on core CPI performance. This sets the stage for potential dollar strength unless today's CPI data reveals weaknesses in consumer spending, particularly in the shelter sector, which might soften short-term rates and, by extension, the dollar's value. Per the full note, a solid core CPI number today would likely fortify bullish sentiment around the dollar.
FX Daily: Dollar bears chase totality
The desk anticipates that a soft US July CPI print could dampen expectations for a September rate hike by the Fed, providing an opportunity for dollar bears. This sentiment is underscored by projections of 0.1% month-on-month inflation for headline and 0.2% for core, which would lead year-on-year rates to fall to 3.4% and 2.5%, respectively. A soft CPI print could lead to a bullish steepening of the yield curve and a softening of the dollar, particularly against procyclical currencies like the euro. Per the full note [source], the prospect of declining inflation could also support risk assets more broadly, positioning for favorable outcomes in the markets ahead.
Easing US price pressure dampen imminent Fed hike talk
The desk believes that the significantly softer US CPI data for June will lead to a recalibration of rate hike expectations from the Federal Reserve, thereby tempering USD bullishness in the short term. As per the full note from ING, headline inflation printed at -0.4% month-on-month, contrasting markedly with the expected -0.1%, pushing the annual rate down to 3.5% from 4.2%. This shift suggests a longer pause in Fed rate increases, impacting short-term USD positioning as traders adjust their forecasts. With no major economic events impacting the dollar in the next month, this environment is conducive to consolidation around current levels.
Global FX: CPI/ USD, Model take-aways, EM rundown
The desk maintains a cautiously bullish stance on the USD, balancing recent soft CPI data against persistent hawkish signals from the Federal Reserve. Per the full note [source], while the CPI print suggests moderating inflationary pressures, the Fed's commitment to tightening policy supports a stronger dollar outlook. The ongoing divergence between U.S. monetary policy and that of other central banks is expected to reinforce this trend, particularly in the short term.
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