Reality Check: Inflation Surprises and the Dollar’s Rebound.
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Dollar’s Rebound: USD surged after CPI data underwhelmed doves — not weak enough to justify Fed cuts, strengthening the greenback.
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Fed Cut Bets Under Pressure: Market pricing for a September rate cut is fading unless US jobs data significantly deteriorates.
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France’s Budget in Focus: French political noise reintroduces concerns about EU fiscal stability, though FX impact is limited for now.
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UK Inflation Sticky: UK services inflation remains stubbornly high, keeping BoE cautious and dependent on upcoming jobs data.
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Eyes on PPI & Fed Speak: US PPI and Fed commentary today could shape rate expectations ahead of the Fed’s blackout period.
USD: Reality Bites for the Doves
The dollar just had its strongest day in a month, reaching a three-week high following the US CPI release. Despite the core CPI coming in slightly softer than expected (0.1% below consensus) and the headline figure hitting forecasts at 0.3% MoM, markets reacted with a Treasury sell-off and a stronger dollar — not the most obvious combination. But this makes more sense when you consider that markets had been heavily leaning into a dovish outlook, driven more by political pressure on the Fed than by hard data or signals from Chair Powell. With inflation not cool enough to justify those expectations, the dovish narrative is cracking.
Looking ahead, the effects of US tariffs are expected to feed into inflation over the next quarter, making it harder for markets to justify a rate cut in September unless the labor market significantly weakens. Meanwhile, positioning in FX markets suggests that the USD bounce may have been amplified by stretched short positions. The takeaway: the bar for dovish policy shifts just got higher, and risks now tilt toward further USD strength. Notably, the market is still pricing in around 14bps of easing for September.
Keep an eye on today’s PPI numbers — the market is braced for a tame 0.2% print, but surprises could shift sentiment. We’ll also hear from several Fed officials before the pre-meeting blackout begins on July 19, with the Beige Book adding insight into regional inflation and growth. But don’t expect yesterday’s CPI data to spark a dovish pivot just yet.
EUR: French Drama Makes a Quiet Return
The euro had a rough day, partly due to resurfacing concerns about France’s fiscal position. While political headlines out of Paris — including threats from Marine Le Pen over proposed holiday cuts to ease the budget deficit — likely contributed to EUR softness, the lack of movement in OAT-Bund spreads suggests limited immediate market impact.
Still, the episode reminds investors that France’s deficit could become a broader EU concern. Any meaningful FX fallout is probably still months away, but it’s something to watch.
For now, EUR/USD is moving in line with USD sentiment. Without major surprises in US data, 1.16 could serve as a near-term balance. However, further hawkish repricing in the US might push EUR/USD closer to 1.15.
GBP: Sticky Services Inflation Muddying the Waters
UK services inflation stuck at 4.7% in June, defying expectations for a drop to 4.5%. According to UK economist James Smith, underlying core services inflation has even crept up in some categories. While much of the stickiness stems from earlier price increases — many of which are backward-looking or regulated — these effects are expected to fade next year.
Still, this means the Bank of England isn’t likely to rush into cutting rates. While cuts in August and November remain likely, much hinges on tomorrow’s labor data. A weak print could add dovish pressure and accelerate the rate-cut timeline.
Sterling has ticked higher on the inflation data, but traders remain cautious ahead of the jobs report. Markets still expect two cuts this year, but are flirting with more dovish scenarios. A soft labor print could push EUR/GBP back above 0.870.