FX Daily: Benign CPI takes sting out of dollar’s upside
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Softer-than-expected CPI leads to a 0.5% drop in DXY.
- 02Market expectations have reduced projected Fed tightening by 10bp.
- 03Focus shifts to upcoming PPI data which could influence dollar sentiment.
- 04Commodity FX may benefit from the softer inflation environment.
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.
Risks to this view
A significant rebound in PPI data or unexpected Fed communications emphasizing a more aggressive tightening stance could erode the recent bullish sentiment towards high-yielding commodity currencies, reversing current dollar weakening.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
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 cycle. Fed officials look to be on the same page, requiring several soft inflation prints to avoid tightening, but the June data must be welcome. Today's focus will be PPI and further Fed testimony.
High-yielding commodity FX should do well Chris Turner , Francesco Pesole and Frantisek Taborsky US inflation came in lower than expected USD: Softer CPI keeps a Fed hold in play Yesterday's release of softer-than-expected June CPI was welcomed by asset markets across the board. As James Knightley writes , the softening in prices was broad-based and is a vote in the direction of ING's house call that the Fed will not be hiking this summer after all. Yet, as Chair Kevin Warsh and many Fed members will agree, one number does not a new trend make.
And another good speech from Chris Waller earlier this week serves as a reminder that the Fed will need to see 'several' soft inflation releases to avoid tightening. That explains why, even though short-dated US rates fell 10bp yesterday, the market still prices 44bp of Fed tightening into next year. Feeding into the above story today will be the June PPI release and more testimony from Warsh.
Remember that components of PPI, such as portfolio management fees, airfares and healthcare, all feed into the Fed's preferred inflation gauge of the core PCE reading. The June reading of core PCE is released on 30 June. Thus, any unwelcome rise in any of those components today could reverse more of yesterday's move in the rates and FX markets.
Overnight also saw some soft Chinese activity data and further escalation in the Gulf. It looks like investors will struggle to price in a benign inflation environment given developments in the energy sector, where both oil and natural gas are on the rise again, while refined products like diesel are surging as Ukraine intensifies its attack on Russian refineries. While soft US CPI data has taken the sting out of the dollar's upside, it is probably too early to look for a much lower dollar just yet.
In this environment, we prefer energy-exporting, high-yield currencies, such as the Norwegian krone, where a 4%+ per annum one-week deposit rate provides reward if volatility drops again in summer markets. DXY has support at 100.50. We can see that holding while energy prices stay bid.
Chris Turner EUR: Unwelcome developments in the energy sector Along with most dollar pairs, EUR/USD very much enjoyed yesterday's soft US CPI release. Were it not for developments in the Gulf and in energy markets in general, we would be happy to call EUR/USD steadily higher from here. But European natural gas is now back to levels seen in mid-March and, as above, it is too early to trade an 'all-clear' US inflation story.
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