US inflation Jumps

The US Dollar is rebounding through the middle of the week after yesterday’s hotter-than-forecast inflation data. Annualised headline CPI printed 2.7% in June, up from 2.4% prior and above the 2.6% the market was looking for. Similarly, both core and headline monthly readings were seen topping forecasts also. In all, the data was firmly hawkish with traders sensing that the uptick in inflation reflects the eventual impact of Trump’s trade tariffs. Given that reciprocal tariffs are set to rise again next month there is now a great deal of uncertainty over US inflation and the potential for price pressures to keep rising. If this is seen, Fed rate cuts later in the year look highly questionable unless we see greater weakness in the labour market.

Tariff Impact

USD bulls had been calling for higher inflation over much of the year so far as a result of the US trade war. However, the anticipated upside impact on inflation failed to materialise with Trump himself arguing that tariffs had no impact on inflation. The general view, however, was that there would be some lag before the inflationary impact was seen. As such, traders will now be waiting to see if this latest reading was a blip or the start of a new trend higher in inflation. If the latter looks likely, easing bets are likely to be scaled back quickly, paving the way for a broader rally in USD.

Technical Views

DXY

The rally in DXY has seen the market breaking above the bear channel highs and above the $98.03 level. While above here, and with momentum studies pushing higher, focus is on a continuation higher with $99.15 the next resistance level to watch ahead of the bigger $100 mark.