Yesterday’s US Consumer Price Index (CPI) report turned out to be hotter than anticipated, yet this might be partly due to seasonal influences, as previously cautioned. Nonetheless, the data reinforced Federal Reserve Chair Powell’s recent testimony, confirming that the Fed will hold off on rate cuts for the moment.
Before the report, traders had already tempered their expectations for a rate cut. According to Fed funds futures, the first anticipated cut was slated for September, totaling around 35 basis points for the year. However, following the report, the timing shifted slightly, with the first full 25 basis point cut now expected in October, reducing the total expected cuts to about 30 basis points for the year.
In my view, this doesn’t represent a significant shift. Unless traders eliminate rate cuts from the equation entirely, we seem to have reached the peak of optimism regarding rates. This situation provides some upward momentum for the dollar, but it appears this may soon diminish.
Amid all this financial analysis, it was former President Trump who unexpectedly took the spotlight. Although the expected reciprocal tariffs didn’t materialize concretely, he hinted at a potential meeting with Putin to address the conflict in Ukraine, a substantial boon for risk trades. As had been suggested:
“While the announcement of reciprocal tariffs might not happen today, it could still occur later this week. So, stay alert. Meanwhile, I imagine that a period of silence could be beneficial for overall risk sentiment. Sometimes, keeping things quiet can be advantageous.
The longer Trump delays on the tariff announcement, the more likely dip buyers are to cautiously enter the market. This wouldn’t be the first time we witness a rapid shift toward risk-taking. However, that also cautions against becoming too complacent if Trump decides to make a decisive move.”
The initial boost to the dollar from the CPI report dissipated as the day progressed. Even though US stocks ended with mixed results, it’s still a positive outcome compared to the initial 1% drop following the inflation numbers, especially considering the uptick in yields.
As we look to today’s market, the dollar finds itself in a vulnerable position again. The EUR/USD has risen above 1.0400, while the GBP/USD approaches 1.2500. Suddenly, the dollar is under broad pressure. A particularly interesting chart to watch will be the USD/CAD, which is testing the waters below the resistance region of 1.4260-80:
If we see a solid technical drop there, it could lead to a swift move toward 1.4100 for the pair, as the dollar experiences widespread pressure.
