U.S. dollar edges higher after U.S. CPI inflation grew as expected in July

The DXY-U.S. dollar index trades to near monthly highs of 102.70 as forex investors remain positive on the dollar outlook amid the growing expectation that the Fed’s interest rates might remain higher for longer after July’s CPI readings.

DXY-U.S. dollar index, 2-hour chart

The stronger dollar adds pressure on the major peers, with Euro failing to break above the key $1.10 psychological level, hovering at around the $1.0980 mark, the Pound Sterling is holding to nearly $1.27, while the Japanese Yen is posting steeper losses, currently trading at nearly the key ¥145 resistance level per dollar.

U.S. CPI readings:

The well-awaited headline U.S. CPI for July rose 0.2% from last month and 3.2% from a year ago, slightly below market expectations of 3.3%, but higher than the 3% in June due to increased fuel prices, a sign that inflation reaccelerated in July for the first time in 13 months.

The core CPI, which excludes volatile food and energy costs, rose 0.2% in July and 4.7% from last year in July but in line with market expectations, and down from 4.8% in June, an encouraging sign that the core goods inflation has started to slow down.

U.S. CPI index for July 2023

Another positive sign on the inflation reading is that the core inflation increased 0.2% for the second straight month, marking the first time since February 2021 that core CPI rose just 0.2% in consecutive months, notably lower than the 0.4% to 0.5% increase to start the year given declines in wholesale used car and trucks prices, and medical care prices.

https://www.bls.gov/news.release/cpi.nr0.htm

Since CPI inflation still maintains far from Fed’s 2% inflation target, investors believe that the central bankers will likely maintain a hawkish stance and keep the door open to a further rate hike of 25 bps in September if the economic data justify it.

In this context, the yields on the 2-year and 10-year Treasury bills jumped to 4.85% and 4.11% respectively on the inflation headlines as investors expect that Fed won’t cut rates anytime soon. https://www.cnbc.com/2023/08/11/treasury-yields-rise-after-the-cooler-than-expected-july-inflation-print.html