US Dollar: Fed pricing and CPI risks – BBH
Brown Brothers Harriman’s (BBH) Elias Haddad notes markets are steady ahead of the United States (US) July Consumer Price Index (CPI) release, which is seen as pivotal for Fed funds expectations and the Dollar. Haddad expects CPI to firm modestly, with downside risks for USD if the data are soft and only limited scope for a hawkish repricing even on a hot print.
USD downside skew around CPI
"Markets are in a holding pattern ahead of today’s critical US July CPI report (1:30pm London, 8:30am New York). The print will be a key swing factor for Fed funds rate expectations and set the tone across rates, currencies, and broader risk sentiment. Fed funds futures currently price in 50% odds of a 25bps hike in September to a target range of 3.75-4.00%, down from a high of 75% end-July, and just over 40bps of cumulative tightening in the next twelve months."
"A soft US CPI would strengthen the case for a dovish repricing in Fed hike expectations and further undermine USD while lifting risk assets. A hot US CPI will likely deliver a kneejerk USD bounce via higher front-end yields. However, with Fed policy already restrictive (assuming a neutral rate of 3.00%), the scope for a material hawkish repricing looks limited which is a USD headwind."
"US July CPI to firm modestly but stop short of signaling a renewed acceleration in inflation. Headline CPI is expected to rise +0.1% m/m vs. -0.4% in June and ease to 3.4% y/y vs. 3.5% in June. Core CPI is expected to rise +0.2% m/m vs. 0.0% in June and ease to 2.5% y/y vs. 2.6% in June."
"The three-month change in core and headline CPI will offer a cleaner read on whether inflation momentum is decelerating or reaccelerating. In parallel, CPI measures which filter out extreme price swings, like trimmed mean, median, sticky, and super core will be key to judging the underlying inflation trend. Both the Atlanta and Cleveland Fed CPI prints will be published at 11:00am New York (4:00pm London)."
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