July US inflation largely met forecasts, with headline CPI up 0.1% m/m and core CPI rising 0.2% m/m, according to TD Securities. The firm cited energy as a drag, with petrol down 3% m/m, alongside easing food inflation, while also pointing to contained tariff pass-through and early signs of normalisation in services prices. It said the unrounded headline CPI reading was 0.074%, against TD’s 0.15% forecast and a 0.1% consensus estimate.
Core CPI printed at 0.215% before rounding, matching TD’s 0.20% call and the 0.2% consensus. The so-called supercore rebounded to 0.19% m/m after a 0.20% fall previously, while goods categories tied to trade pressures strengthened, including vehicles, communication and recreation. TD expects the CPI details to map into core PCE inflation of 0.18% m/m, though it flagged Producer Price Index data as a potential risk to that estimate. Market pricing for a September rate rise remained just under 50%.
Implications For The Federal Reserve And The US Dollar
With July’s headline CPI rising just 0.1% and core inflation at 0.2%, the pressure on the Federal Reserve to raise rates has eased. We believe this cooling trend, supported by a 3% drop in gasoline prices, confirms that inflation pressures are stabilizing. Consequently, we expect the US Dollar Index (DXY), which has recently slipped below the 103 level, to face continued downward pressure in the coming weeks.
Trading Strategies And Risk Management
For derivative traders, this environment of a weakening dollar presents a prime opportunity to position for further downside. We suggest buying put options on the DXY or shorting US dollar futures against stronger G10 currencies. With the EUR/USD pair pushing past 1.09, call options on the Euro offer a high-probability setup as the greenback loses its appeal.
In the rates space, September rate hike pricing has fallen below 50%, meaning the Fed is highly likely to stay on hold. We recommend building long positions in Secured Overnight Financing Rate (SOFR) futures to capitalize on this steady interest rate outlook. Additionally, trading volatility in Treasury options will be useful as 10-year yields settle near the 3.9% range.
Still, we must watch the upcoming Producer Price Index (PPI) data closely, as it carries risks for our 0.18% core PCE inflation forecast. Any unexpected jump in wholesale inflation could quickly revive rate hike fears and reverse the dollar’s losses. To manage this risk, we advise using tight stop-loss orders on all bearish dollar positions ahead of the next macro releases.
