Inflation weakens the dollar, comments from the Fed do the opposite

The US inflation data supports the approach of the Fed, which can be summarized as: let's wait and see. September's interest rate hike may turn into a pause, but it may also turn out that July's upward move in interest rates was the last in the entire cycle of monetary tightening. Further data will be closely monitored. The dollar initially weakened, but in the following hours there was an opposite reaction (caused by comments from Fed's Mary Daly) and finally EUR / USD exchange rate closed the day below 1,10. The market valuation of future increases in the cost of money in the US has been reduced only to a small extent.

Inflation down, labor market loses momentum

We found out on Thursday US inflation has declined, thus confirming the positive trend from June data. Moreover, higher than expected number of new jobless claims (248 vs. 230 expected) confirmed that the labor market is losing momentum. As expected, consumer prices rose by only 0,2%. month to month, as in June. The underlying indicator (excluding energy and food) which is important as a trend indicator as well amounted to only 0,2 percent.as in June. Headline inflation rose to 3,2 percent. y/y (expected 3,3 percent) and the base year-on-year ratio fell to 4,7 percent. from 4,8 percent in June.

Data published since the last meeting therefore suggest that aggressive tightening of monetary policy in the US brings more and more desirable effects. The FX market also seems to see a continuation of the rate hike cycle as less and less likely, as evidenced by the initial weakening of the USD after yesterday's data.

The subsequent reverse reaction was caused by the statements of the representative of the Fed from San Francisco - Mary Daly. She said that the Federal Reserve still has "a lot of work to do" and yesterday's data is not a sufficient argument to declare victory over inflation. However, it should be remembered that a representative of the US central bank is not entitled to vote this year. Therefore, I believe that this reaction was temporary and the dollar should return to a depreciating move.

Now the market's attention will be focused more and more on the comments of individual Fed decision makers. They will, however, try to signal gentle end of the cycle but at the same time they will be careful not to fuel expectations for imminent rate cuts.

Source: OANDA TMS Brokers