How is the USD going to react? - Commerzbank

Today, the foreign exchange market will probably focus primarily on the US inflation figures, which will be published at 1:30 pm BST. According to a Bloomberg survey, core inflation is expected to accelerate slightly. While prices excluding food and energy rose by 0.23% in June, the median of economists surveyed expects an increase of 0.3% in July. However, this alone should not make any difference to EUR/USD. After all, this expected acceleration should already be priced into the currency market. It will, of course, be more interesting if there is a surprise, Commerzbank's FX analyst Volkmar Baur notes.

Future USD reaction hinges on Fed independence

"If inflation turns out to be higher than expected, the USD would likely appreciate. This is because, in this case, a corresponding reaction from the US Federal Reserve would be expected. Higher-than-expected inflation would normally lead to a more hawkish Fed, while lower inflation would tend to result in looser monetary policy and thus a weaker US dollar. If you look at the surprises in the monthly change in core inflation and compare them with the daily change in the trade-weighted US dollar, you can also see a certain correlation. Over the past twelve years, the US dollar has tended to strengthen when inflation has surprised on the upside."

"We are not entirely sure to what extent political pressure from the Trump administration could prevent the Fed from responding appropriately, or at least slow down the necessary hawkish response. From this perspective, a look back is certainly illuminating. If we break down the inflation-dollar analysis by time periods, we see that, although there has been a positive correlation between inflation surprises and USD appreciation over the last 12 years as a whole, this was not the case between 2017 and 2021, i.e. during Donald Trump's first term in office. During the Biden years, however, the correlation was all the more pronounced."

"Since Trump returned to office, this positive correlation has held so far. However, there has only been a handful of inflation data since then. In addition, one release fell on 10 April, shortly after Donald Trump announced the 90-day pause on Liberation Day tariffs. If this data point is removed, there is once again no correlation between inflation surprises and the development of the USD. However, we are then only talking about five data points, which is essentially anecdotal evidence. How the relationship between inflation and the US dollar develops further remains to be seen and will depend not least on how often and how strongly Donald Trump and his administration feel compelled to comment on the Fed's monetary policy."