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DXY Hits One-month Lows Under 105.00 After Soft US CPI; NZD/USD Surges 1.9%

By:
Joel Frank
Published: Aug 10, 2022, 19:48 UTC

The latest softer than expected US inflation figures resulted in markets dialling back on Fed tightening bets.

Dollar

In this article:

Key Points 

  • The US dollar index slumped 1.0% on Wednesday after US CPI surprised to the downside.  
  • The headline YoY rate fell to 8.5% from 9.1% in June, larger than the expected drop to 8.7%. 
  • Markets aggressively pared Fed tightening bets.  

US Dollar Battered as Markets Pare Fed Tightening Bets Following Soft CPI Figures 

The US dollar index slumped 1.0% on Wednesday and, ahead of the close of US trade, was on course for its worst day since mid-June after printing fresh one-month lows under 105.00. US Consumer Price Index data for July surprised to the downside, hitting the buck as traders pared back on aggressive Fed tightening bets. The MoM rate of headline inflation was 0.0% in July, below expectations for a drop to 0.2% from 1.3% in June.  

The headline YoY rate fell to 8.5% from 9.1% in June, larger than the expected drop to 8.7%. Much of the decline in headline prices owed itself to a 20% decline in average gasoline prices in the US in July versus June. But core measures of inflation also contained promising signs. The core index rose at a pace of 0.3% MoM and 5.9% YoY, below expectations for 0.5% and 6.1%, with the former a deceleration on June’s 0.5% MoM increase and the latter remaining unchanged.  

Markets interpreted the data as reducing the need for the Fed to implement a third successive 75 bps rate hike in September. According to the CME’s FedWatch Tool, money markets were last pricing a 62.5% chance that the Fed instead goes with a smaller 50 bps rate hike in September versus 32% one day ago.  

Analysts were keen to point out that these expectations could easily shift, given that August jobs and CPI data will both be released prior to the Fed’s September confab. Fed policymakers speaking on Wednesday in wake of the data continued to talk tough about the need to prioritize the fight against inflation. Neel Kashkari, who has typically been viewed as the Fed’s most dovish member, lambasted the idea of rate cuts in early 2023 as “unrealistic”. None overtly commented on whether a 50 or 75 bps rate hike next month would be appropriate. 

For now, as markets price in a more benign economic outlook (of stronger growth but peaking/falling inflation), the ongoing risk asset rally could well weigh further on the US dollar. Technicians say the DXY has broken key technical support in the form of a long-term uptrend, which also bodes poorly. But given the relative strength of the US economy in comparison to the likes of the Eurozone, UK and Japan, and the still comparatively hawkish outlook for Fed policy versus the likes of the ECB, BoE and BOJ, the outlook for a rapid, sustained dollar drop still doesn’t look good.  

EUR/USD Hits One-Month Highs, GBP/USD Recovers Into 1.22s 

In terms of the G10 forex majors; EUR/USD printed fresh more than one-month highs in the 1.0360s, though has since pulled back to the 1.0300 area after hitting significant resistance. GBP/USD rallied 1.2% back into the 1.22s, with comments from BoE’s Huw Pill who warned about hot wage inflation flying under the radar in the US CPI aftermath. 

USD/JPY was at one point on course for its largest one-day drop since March 2020, with it trading 2.2% lower on the day when at earlier session lows just above 132.00. The pair, which was weighed by a significant post-downside US CPI surprise drop in US bond yields across the curve, was last trading a more modest 1.5% lower on the day. The Aussie and kiwi, meanwhile, gained 1.7% and 1.9% respectively versus the buck, with both flying amid the positive tone to risk appetite.  

About the Author

Joel Frank is an economics graduate from the University of Birmingham and has worked as a full-time financial market analyst since 2018. Joel specialises in the coverage of FX, equity, bond, commodity and crypto markets from both a fundamental and technical perspective.

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