The recent US Consumer Price Index (CPI) reading has ignited discussions and speculation regarding the future monetary policy of the Federal Reserve. Traders and investors have closely scrutinized the implications of this report, seeking insights into the direction of interest rates and the overall stance of the central bank. To gain further perspective on the matter, we reached out to Matthew Ryan, CFA, an expert in the field, for his analysis.

Ryan emphasizes that the US dollar experienced a widespread sell-off in response to the soft US inflation report. The June data revealed a significant easing of headline inflation, reaching its lowest level in over two years. Equally notable was the unexpected drop in the critical core index, falling below 5% for the first time since November 2021, marking a significant turning point.

The dollar selling off across the board after soft US inflation report intensified bets that the Federal Reserve's rate hike cycle may soon be nearing an end. Headline inflation eased sharply in June, falling to its lowest level in more than two years, while the critical core index also unexpectedly dropped below 5% for the first time since November 2021 - somewhat of a watershed moment.

The retreat in the sticky core inflation measure will be particularly welcome news for the Fed, as it suggests that the bank's ultra-aggressive tightening cycle is finally bearing fruit. There remains a long way to go before underlying price pressures return to target, though the notion that almost all metrics of US inflation are trending in the right direction will be highly comforting for officials.  

Recent hawkish communications from FOMC officials, including chair Powell, suggest that another 25 basis point rate hike remains highly likely later this month. We are, however, of the opinion that additional hikes beyond then are far from guaranteed, and are increasingly confident in our call that the July hike will be the last in the current cycle, before rate cuts commence at some point in H1 2024. We think that this dovish pivot should open the door to additional downside in the US dollar in the coming months.

 

 - Matthew Ryan, CFA