US Dollar: Bearish momentum extends after CPI – TD Securities

TD Securities strategists note that July US inflation came in broadly in line with expectations, with headline CPI rising 0.1% m/m and core CPI increasing 0.2% m/m. They see contained tariff pass-through and signs of normalization in services inflation as reducing the need for tighter Federal Reserve policy, while maintaining their view that the Fed will keep its policy stance unchanged this year.

Dollar weakens as Fed seen on hold

"Consumer price inflation matched expectations in July, with the headline rising 0.1% m/m (0.074% before rounding; TD: 0.15%, consensus: 0.1%). This was partly explained by still retreating energy prices (gasoline -3% m/m) and slowing food inflation."

"The core segment also printed on top of expectations, growing 0.2% m/m (0.215% before rounding; TD: 0.20%, consensus: 0.2%). The rebound in the core was broad-based with both services and goods resuming modest momentum after a soft June showing. As expected, the supercore bounced back to 0.19% m/m after falling 0.20% in the last report."

"Notably, July's goods prices indicate tariff passthrough was firm, with some categories exposed to trade picking up. With that said, passthrough remains modest. Vehicle prices, communication, recreation, and other goods were among the key drivers of strength in the goods basket. All in, we expect July CPI data to translate into slightly softer core PCE inflation at 0.18% m/m."

"Today's report should continue to bring relief to the Fed regarding the need for tighter policy, at least in the near horizon. Signs of normalization in services prices along with tariff pass-through that remains under control bode well for concerns around sticky core inflation. All in, we remain of the view that the Fed will keep its policy stance unchanged this year."

"Markets remain relatively unchanged in the wake of the July report, with the pricing for a hike in the September meeting still sitting just under 50%. All in all, the print is supportive of a Fed hold, but we are still waiting on further data before the September meeting since the Fed has lowered the bar for a rate hike. In addition, the PPI report carries some risks to our 0.18% m/m preliminary PCE forecast."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)