USDOLLAR post CPI reaction suggests low-hanging fruit has been picked

The recent inflation data for July in the US, which was released yesterday, matched expectations quite closely. This has reassured the markets that there are no immediate setbacks in the process of reducing inflation. The core inflation rate decreased slightly from 4.8% to 4.7%, while the headline rate increased from 3.0% to 3.2%. This increase was due to a smaller base effect compared to previous months, although it was still lower than the consensus forecast of 3.3%. All components except housing prices showed a clear decrease in price pressures.

Overall, the US report provided reasons for both the Federal Reserve (Fed) and risk assets to be optimistic, as the likelihood of another interest rate hike decreased further. Typically, in this scenario, the value of the USDOLLAR would have decreased across different currencies. However, the post-inflation data situation in the foreign exchange (FX) market was more mixed. Despite the inflation figures and the subsequent favourable market conditions, many high-beta currencies struggled to hold onto their gains.

The July data highlights the challenges the Fed still confronts in its efforts to control inflation. Energy has increased to the point that gasoline prices have been steadily rising recently. This could result in an upward pull on the overall figure in the August data.

In addition, with core inflation showing only a minor deceleration, there is a resurgence in medium- to long-term anticipations of inflation. This development may raise concerns within the Fed, given their prior warnings that heightened consumer expectations of persistent high prices could result in a deeper entrenchment of inflation. This potential outcome might complicate the Fed's efforts to address and control the situation effectively, resulting in a "higher for longer" scenario. As such, the USDOLLAR whilst showing initial signs of weakening, recoup quickly, with dollar bulls taking prices higher for the day.