The US CPI report yesterday was a hotter one but again, it could perhaps owe a bit to seasonality as warned. In any case, all it served was to reaffirm Fed chair Powell’s stance during his testimony this week that the Fed will be pausing on rate cuts for the time being.
Traders had already dampened expectations of a rate cut ahead of the report though. Fed funds futures showed the first one to be in September and just ~35 bps of rate cuts in total for the year. Now, the first full 25 bps rate cut is priced for October with ~30 bps of rate cuts in total for the year.
I would argue that’s not too much changed and unless traders are going to price out rate cuts entirely, we’re reaching a ceiling of optimism on rates here. That’s a tailwind for the dollar that looks to be close to running its course.
But all in all, it was Trump that sort of stole the show yesterday. Reciprocal tariffs did not come to fruition, at least not concretely, and he’s talking about meeting with Putin to end the war in Ukraine. It’s a massive win for risk trades. And as mentioned:
“The announcement (reciprocal tariffs) might not come today but it still could later in the week. So, just keep your eyes and ears peeled. But in the meantime, I reckon silence might be golden for risk sentiment in general. See no evil, hear no evil, speak no evil.
Until Trump really delivers on reciprocal tariffs, the longer the announcement gets delayed should invite dip buyers to slowly test the waters. It wouldn’t be the first time we get this sort of quick switch to greed. But again, that also invites complacency to when Trump really drops the bomb.”
The dollar saw its gains from the immediate CPI reaction melt away and then some now as we get into the new day. Meanwhile, US stocks might have ended more mixed but I’ll label it as a win compared to the 1% drop initially after the inflation numbers. And all of this came despite yields jumping higher.
Looking to today, the greenback is now in a vulnerable spot again. EUR/USD is above 1.0400 and GBP/USD is closing in on 1.2500 on the day. All of a sudden, it is the dollar that is under pressure across the board. One chart to watch will be USD/CAD as it looks to be testing waters below the resistance region of 1.4260-80 now:
USD/CAD daily chart
A firm technical drop there could see a quick run towards 1.4100 next for the pair as the dollar comes under pressure across the board.