USD: Inflation reality can have lasting effect - ING

The US Dollar (USD) had the best day in a month yesterday, hitting a three-week high after the US CPI release. The Treasury-off, dollar-on is admittedly not the most intuitive reaction to a core CPI month-on-month print 0.1% below consensus and the headline rate in line with expectations at 0.3% MoM, ING's FX analyst Francesco Pesole notes

Fed is speaking today

"That is, however, justified by how markets were (before CPI) sitting on a dovish stance that was backed more by speculation that US President Donald Trump's pressure would have ultimately permeated the FOMC, rather than data or Federal Reserve Chair Jerome Powell's communication. A materially cooler-than-expected inflation print was needed for those dovish bets to be validated. We expect, in line with economic consensus, that there is more to be seen in terms of tariff impact on inflation in the next three months. From here, markets should have a harder time justifying bets on a September cut unless jobs data capitulates."

"From the FX angle, it is quite likely that a stretched dollar short positioning triggered a slightly outsized USD bounce. But yesterday's reality check on Fed cuts speculation could have a lasting effect by raising the bar for dovish repricing, and we therefore feel the risks remain skewed to a stronger dollar from here. After all, markets are still pricing in 14bp for the September Fed meeting."

"Some extra clarity on the inflation story will come with PPI data today. Expect markets to move on any surprise, although consensus is already positioned for a relatively benign 0.2% MoM print on headline and core PPI. Investors may take some hints from the Fed's Beige Book released tonight, which offers valuable insights into regional inflation and activity trends. We'll also hear the last few comments from Fed officials before the blackout period starts on 19 July. Today, Lorie Logan, Thomas Barkin, Beth Hammack, Raphael Bostic, and John Williams are all due to speak. We doubt yesterday's numbers have been enough to trigger any dovish shift in their policy views."