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US dollar drops and then rebounds on CPI report. What's next

The latest US Consumer Price Index (CPI) report closely aligned with anticipated outcomes, with both the core and headline month-over-month (m/m) readings registering at +0.2%, consistent with consensus forecasts. A more detailed examination, however, reveals that both figures were slightly lower at +0.16% and +0.17% respectively, when rounded off. Additionally, the year-over-year measurements fell just short of projected values.

Following the report's release, the immediate market response witnessed a decline in the US dollar, with the USD/JPY currency pair experiencing a 50-pip drop, reaching a session low of 143.31. Comparable albeit modest shifts were observed in other markets as well.

Subsequent to the significant initial movement and subsequent retracement, there seems to be a renewed bout of US dollar selling manifesting across markets beyond the USD/JPY pair, which tends to exhibit a positive correlation with risk sentiment. An illustrative instance of this trend is observed in the AUD/USD pair, which is starting to show incremental upward movement once more.

I concur that the initial swift response was appropriate, and it's plausible that we might revisit certain price levels in due course. Given the limited information provided in the CPI report, the prospect of a September interest rate hike seems improbable, unless an unexpectedly substantial increase in September CPI figures coincides with a robust non-farm payrolls report. Looking ahead, there is substantial rationale to speculate that the Federal Reserve's tightening cycle could be concluded.


Market Analyst

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