As US disinflationary process continues, what will the Fed do next?

August 11, 2023 03:24 AM PDT | By Invezz

As US disinflationary process continues, what will the Fed do next? — Image source: Invezz

Takeaways from the July US CPI report

Besides the actual numbers, the July inflation report contains some interesting developments. First, it shows a slower demand for services. For instance, restaurant prices momentum is slowing rapidly. Also, domestic airfares are slowing too.

Second, while the disinflationary process remains in place, risks from higher energy prices are worth noticing in the months ahead.

Will the Fed hike in September?

This is where it gets interesting.

Ahead of the July US CPI report, the odds of a September rate hike were 15%. Following the report, they dropped to 10%.

Never had the Fed disregarded what the market priced, so the chances of a Fed rate hike in September are close to zero.

Hence, the report should have triggered a bearish reaction for the US dollar and a bullish one for the stock market. But it didn’t.

How did the US dollar react?

In fact, the US dollar traded with a mixed tone. For example, the EUR/USD pair rallied about sixty pips on the news, only to give up all the gains in the following hours. Also, the USD/JPY, after an initial dip, rallied close to 145.

Summer trading brings slow-moving markets, which might be why there was little reaction to the inflation report. Or, perhaps, because the data came out almost as expected, it means that it was already priced in.

All in all, the US CPI report brought good news for the Fed. It might just be that the Fed is closer to the terminal rate, in which case the US dollar has a hard time rallying.

The post As US disinflationary process continues, what will the Fed do next? appeared first on Invezz.

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