Dollar Drops As Softening CPI Renews Rate Cut Hopes

(RTTNews) - Renewed expectation of Federal Reserve rate cuts triggered by softer-than-expected inflation readings dragged the U.S. dollar down during the week ended July 12. The U.S. dollar slipped against the euro, the British pound, the Australian dollar as well as the Japanese Yen. The Dollar Index, which measures the Dollar's strength against a basket of 6 currencies also declined heavily during the week.

The Dollar Index or DXY shed 0.75 percent for the week ended July 12. The Index which was at 104.88 on July 5 slipped over the course of the week to close at 104.09. The week's trading range was slightly wider, with a high of 105.21 recorded on Tuesday and a low of 104.04 on Friday.

Data released by the U.S. Bureau of Labor Statistics on Thursday showed month-on-month CPI at -0.1 percent. Markets had expected the same to edge up to 0.1 percent from 0 percent in the previous month. The core component thereof which was seen steady at 0.2 percent also surprisingly dropped to 0.1 percent.

Data also showed the headline annual inflation declining to 3 percent, surpassing expectations of a drop to 3.1 percent from 3.3 percent in May. The core component thereof which was seen steady at 3.4 percent also declined to 3.3 percent, providing a positive surprise.

The unexpected month-on-month decline in consumer prices came close on the heels of Fed Chair Jerome Powell's Congressional testimony earlier in the week where he insisted on more evidence of disinflation as a prerequisite for rate cuts. Markets also cheered Fed Chair Jerome Powell's Senate testimony on Tuesday where he acknowledged the risk of keeping monetary policy restrictive for too long. Powell's remarks that more good data could open the doors to interest rate cuts was also well received by markets. A higher-than-expected reading of producer prices on Friday did not have much effect on the Dollar's descent as markets overwhelmingly geared towards a rate cut in September.

The CME FedWatch tool that tracks the expectations of interest rate traders evidenced this change over the course of the week. The probability of a Fed rate cut in the review scheduled for September jumped to 96.2 percent on July 12 from 75.6 percent on July 8. Likewise, rate cut expectations for the November review increased to 98.5 percent on July 12 from 86.2 percent on July 8. While markets had on July 8 expected a probability of 96.7 percent for a December rate cut, it surged to 99.8 percent by July 12.

The EUR/USD pair rallied 0.65 percent during the week ended July 12 amidst a sharp contrast in the monetary policy outlook by the Federal Reserve and the European Central Bank. While the Fed is expected to cut rates in September, the ECB is widely expected to hold rates steady in its review on Thursday. The pair jumped to 1.0906 from 1.0836 a week earlier. The weekly trading ranged between 1.0802 and 1.0912.

The greenback's weakness, driven by renewed Fed rate cut likelihood and an improved growth outlook for U.K. helped the sterling leap 1.44 percent against the U.S. dollar during the week ended July 12. The GBP/USD pair rallied to 1.2992 on July 12 from 1.2808 a week earlier. The sterling's weekly trading range was between $1.2777 and $1.2995. Data released on Thursday had shown the U.K. economy expanding by 0.4 percent in May. After a flat reading in April, markets had expected a growth of 0.2 percent only in May.

The Aussie also rallied against the greenback during the week spanning July 5 to 12. From 0.6749 recorded on July 5, the AUD/USD pair increased to 0.6783. The pair touched a low of 0.6723 on Tuesday and a high of 0.6800 on Thursday. Data released on Monday had shown a downtick in the consumer confidence indicator and a rebound in the business confidence indicator.

The Japanese Yen staged a strong rebound against the U.S. Dollar in the backdrop of softer-than-expected inflation readings in the U.S. The USD/JPY pair closed the week ended July 12 at 157.89 versus 160.72 on July 5. The pair dropped from the high of 161.85 on Wednesday to a low of 157.38 on Friday triggering widespread speculation about a regulatory intervention in the currency markets.

While political developments in the U.S over the weekend lifted the Dollar Index to 104.32 earlier in the trade, it is currently at 104.13, edging up above the flatline. The EUR/USD pair has edged up to 1.0911 whereas the GBP/USD pair has slipped to 1.2982. The AUD/USD pair has edged down to 0.6778. Amidst the yen's weakness, the USD/JPY pair has increased to 158.02.