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Dollar awaits US July CPI as Fed hike odds hinge on inflation print
Fed funds futures are pricing 50% odds of a 25 bps September hike, down from 75% at end-July, with BBH noting a soft CPI could weaken the USD while a hot CPI may spark a near-term USD bounce.
Brown Brothers Harriman strategist Elias Haddad said markets are holding steady ahead of the US July CPI release, which he flagged as a key catalyst for Fed funds rate expectations and the US dollar.
According to BBH, investors are currently pricing 50% odds of a 25 bps hike in September, with the target range seen at 3.75% to 4.00%, down from 75% end-July. BBH also said futures imply just over 40 bps of cumulative tightening over the next 12 months.
BBH expects CPI to firm modestly, with downside risks for the dollar if the data come in soft and only limited scope for a hawkish repricing even on a hot print. He said Fed policy is already restrictive, assuming a neutral rate of 3.00%, which would weigh on the chance of a larger USD-positive shift.
The CPI expectations highlighted by BBH include headline CPI rising 0.1% month over month versus minus 0.4% in June, and edging to 3.4% year over year from 3.5% in June, while core CPI is seen rising 0.2% month over month versus 0.0% in June and easing to 2.5% year over year from 2.6% in June. BBH added that the three-month change in core and headline CPI, plus filtered measures such as trimmed mean and sticky components, will be closely watched, alongside the Atlanta and Cleveland Fed CPI prints at 11:00am New York.