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The DXY Index depreciated by 0.5% after July’s US CPI inflation came in below expectations at 0.2% MoM and 2.7% YoY, alleviating tariff-induced inflation worries, and reinforcing the market’s conviction for a September Fed cut. Following the CPI release, US Treasury Scott Bessent floated that the Fed should think about a 50 bps cut, hopeful that National Economic Council Advisers Chairman Stephen Miran – US President Donald Trump’s nominee to replace departing Fed Governor Adriana Kugler – would be confirmed to the Fed by the September 17 FOMC meeting. Apart from Miran, Trump’s nomination of Heritage Foundation chief economist E.J. Antoni to lead the Bureau of Labor Statistics also signalled more political interference to tilt policy towards more interest rate cuts.
If the doves gain more sway within the Fed, the Kansas City Fed’s Jackson Hole Economic Policy Symposium, scheduled for August 21-23, will increase in significance. Markets will be alert to Fed Chair Jerome Powell toning down on vigilance regarding less transitory tariff-linked inflation and stepping up concerns about the ongoing tariff-related uncertainties undermining business confidence and hiring decisions. San Francisco Fed President, who has a strong background as a labour economist, has cautioned about the need to be attentive to early inflection points that could lead to the labour market deteriorating quickly once momentum turns.
The big winners overnight from the increased bets on Fed cuts were the European currencies. CHF appreciated by 0.7%, followed by 0.5% in both EUR and GBP. Interest rate differentials are expected to move against the USD because the European Central Bank and the Swiss National Bank are near the end of their easing cycles. The Bank of England is not politically constrained like the Fed to maintain a cautious, data-dependent approach to lowering rates. The JPY could recover more of July’s losses if the Fed cut expectations overshadow the market’s focus on delayed Bank of Japan hikes and dial back more of the recent upward momentum in JGB yields.
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