US Inflation details ease concerns of energy spillover effects
At a Glance
The current commentary indicates a lessening of inflation concerns in the U.S. as core inflation showed unexpected resilience despite a spike in gasoline prices impacting the headline figures. Per the full note from ING, while headline inflation increased 0.5% month-on-month in May, the core inflation rate was softer than anticipated at 0.2% month-on-month, suggesting that underlying price pressures may not be as acute as previously feared. This divergence has led to a subtle shift in Fed rate hike expectations, with the probability of a 25 basis point increase by 2026 slightly diminished. Overall, this easing inflation narrative may support a more stable outlook for the USD against other currencies in the near term, especially as gasoline prices are expected to moderate in the coming months.
Key Takeaways
- 01Core inflation softened to 0.2% MoM, below the 0.3% consensus forecast.
- 02Gasoline price increases significantly influenced headline inflation but are expected to reverse.
- 03Fed rate hike expectations for reaching a 25bp increase by 2026 have lessened.
- 04These inflation dynamics might stabilize the USD's position against major currencies.
Full Analysis
What the desk is arguing
The desk posits that easing inflation concerns in the U.S., particularly from the latest core CPI print, could stabilize the USD in the near term. Per the commentary, core inflation rose only 0.2% month-on-month, falling below the consensus estimate of 0.3%, which adds a cushion against aggressive rate hike expectations from the Federal Reserve.
Supporting this view, the sharp rise in gasoline prices contributed to the headline inflation rate of 4.2% year-on-year. However, this spike is likely to reverse as prices at the pump have already started to decline. With national gasoline prices averaging $4.15/gallon after peaking at $4.50, we may anticipate a significant impact on the upcoming CPI metrics.
Where it sits in our coverage
As of now, our consensus target for the USD is 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26
This aligns moderately with the current desk's call, which suggests that steady core inflation may prevent significant depreciation of the USD, positioning us toward the upper bound of the consensus range.
How other firms see it
Firms aligned with the desk's view, like jpmorgan, anticipate a stable near-term outlook for the USD. Conversely, bofa expresses more caution, positing potential weakness against other currencies.
Given this backdrop, watch the USD/EUR pair as it could reflect the contrasting trajectories in policy expectations from the respective central banks. The ongoing U.S. inflation narrative continues to provide context for valuation movements in forex markets.
Market Implications
Traders should monitor the USD/EUR and USD/JPY pairs for signals of volatility stemming from shifts in inflation data. As gasoline prices normalize, any divergent moves in inflation metrics may signal further positioning adjustments, specifically looking for opportunities around 1.075 levels against the EUR.
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Articles US Inflation details ease concerns of energy spillover effects 14:56 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download While US headline inflation was lifted by sharp gasoline and airline fare increases, other components were bett
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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.