Wednesday Overview

This morning’s U.S. CPI release has set the tone for market activity, with inflation coming in slightly higher than expected. While the initial reaction saw the U.S. dollar bid higher, it has since retraced back to near pre-report levels. Key highlights include:

Market Overview

• EUR/USD: Down 0.18%, as the dollar briefly strengthened post-CPI. -
• GBP/USD: Sterling is lower by 0.41%, reflecting broad dollar resilience.
• USD/CAD: The Canadian dollar is down 0.3% against the U.S. dollar in early trading.

U.S. CPI & Interest Rate Expectations

• Inflation Report: U.S. CPI was expected at 2.9%, but actual data showed a slightly higher 3% reading.
• Market Reaction: Initial dollar strength has faded as traders digest the implications for future rate cuts.
• Rate Cut Expectations Pushed Back:
  • Prior to the report, markets were anticipating a possible July rate cut.
  • With this inflation print and additional tariff concerns, expectations have now shifted further out to December.

Tariff Uncertainty & Policy Implications

• Potential Tariff Impact: The White House is considering further tariffs, which could increase consumer inflation, making it even harder for the Federal Reserve to justify rate cuts.
• Market Settling into a Range: Despite today’s data, markets remain range-bound as traders await more clarity on tariff policy and its potential inflationary effects.
• Trump’s Interest Rate Stance: While Trump has previously advocated for lower interest rates, rising inflation and impending tariffs on steel, aluminum, and other metals could complicate that outlook.

Looking Ahead

With inflation showing signs of persistence and the potential for trade policies to drive prices even higher, further guidance from policymakers is needed before the market takes a definitive stance on the dollar’s next move.

Until then, expect a wait-and-see approach from market participants as they assess future inflation risks and Federal Reserve policy adjustments.