The US dollar index has weakened further, trading at 99.77 on Friday, down 0.10% on the day as continued soft inflation data continues to reduce bets on Federal Reserve rate hikes. According to Business Standard, data released yesterday showed US core producer prices increased less than expected in July, offering further evidence that inflationary pressures are not broadly intensifying following Wednesday's subdued CPI report. The 10-year US Treasury yield hovered around 4.65% on Friday, holding a recent decline as softer-than-expected inflation data led investors to reduce expectations for a Federal Reserve rate hike in September. Among basket currencies, EUR/USD and GBP/USD are both up marginally to the tune of DXY weakness, as the dollar's decline continues to support major currencies.
Fed funds futures now show a 35% probability of a September hike, down from 40% on Wednesday and 55% a week earlier, as reported by Reuters. According to The Economic Times, money markets reduced the odds of a September rate hike significantly following the benign inflation data, with U.S. Treasury yields falling as the jobs report dashed hike bets, with those on benchmark U.S. 10-year notes last at 4.637%. Michael Wan, a currency strategist at MUFG, said the primary dilemma for the Fed now lies in weighing inflation risks against a softening labour market, particularly after the weaker-than-expected July payrolls report released last Friday. "We think that the FOMC is likely to maintain a restrictive holding pattern in September rather than a pivot towards a hike," Wan said in a note. The futures market has scaled back the chance of a September move to around 52%, from 67% a week ago, as reported by Reuters.
The US Bureau of Labor Statistics (BLS) reported that the headline Consumer Price Index (CPI) growth cooled down to 3.4% on year from 3.5% in June, with core CPI which excludes volatile food and energy items also arrived lower at 2.5% YoY, against the previous reading of 2.6%. The annual reading is seen retreating to 3.4% from 3.5% reported in the previous month, as reported by Reuters. Core CPI figures, which exclude volatile food and energy prices, are expected to post an increase of 0.2% and 2.5%, on a monthly and yearly basis, respectively. According to TD Securities, July core CPI likely rebounded after June's one-of weakness, rising 0.20% m/m as services inflation reaccelerated, led by rents/OER, airfares, medical, and recreation. Core goods likely posted their first increase in three months, while headline CPI likely rose 0.15% m/m, with lower gasoline offset by faster grocery prices. As noted by The Hindu BusinessLine, ING analysts wrote that there is a path ahead for easing in inflation as we progress through the remainder of 2026, assuming oil prices remain contained and the Strait of Hormuz reopens.
The dollar index is edging up near a one-week high and very close to the 100 mark on Thursday morning in Asia, with extended gridlock between US and Iran and tensions over re-opening of the Strait of Hormuz that deeply affect oil prices and thereby inflation seen supporting the greenback. According to Business Standard, the extended gridlock between US and Iran and tensions over re-opening of the Strait of Hormuz that deeply affect oil prices and thereby inflation is seen supporting the greenback. The dollar index that measures the greenback against a basket of currencies is quoting at 99.87, down marginally on the day, while the yield on the 10-year US Treasury note eased to around 4.68%. Shusuke Yamada, head of Japan FX/rates research at Bank of America, said investors can only judge the authorities' commitment to defending the yen through dollar-yen price action and the policy response that follows. "A break above 160 would likely be interpreted as a sign of limited policy resolve, while successful intervention that pushes USD/JPY below 155 would have strengthened perceptions of strong commitment at least until recently," Yamada said.
Markets now shift focus on the US Producer Price Index (PPI) data for July for further clarity following the CPI release. According to Business Standard, markets will pay close attention to the monthly core CPI print to see how volatile energy costs are spreading into the wider economy. A monthly core CPI increase of 0.3% or higher, in addition to the elevated uncertainty surrounding the Oil price outlook, could revive expectations for a Fed policy tightening step in September and boost the US Dollar (USD). Since CPI is a lagging indicator, the market reaction could remain short-lived, with investors likely to continue assessing changes in Oil prices. The euro was little changed at $1.1523, while sterling edged down 0.05% to $1.3489 ahead of a slew of UK data including GDP. The Australian dollar eased 0.2% to $0.7049, but was still close to Wednesday's 10-week high of $0.7091, while the New Zealand dollar slid 0.4% to $0.5832, continuing its gradual retreat from the highest levels since early June. Retail sales data on Friday will be the next test of U.S. economic strength.
