The dollar fell on Tuesday after a surprisingly soft U.S. CPI report prompted markets to sharply scale back expectations for Fed rate hikes. Headline CPI fell 0.4% in June, well below the consensus forecast for a 0.1% decline, while core CPI was unchanged against expectations for a 0.2% increase.
The inflation data saw implied odds of a July Fed hike tumble to 15% from more than 40%. The benign reading contrasted with a small-business survey showing inflation remained a top concern despite improving sentiment. In congressional testimony, Fed Chair Kevin Warsh said the soft inflation reading does not mean the Fed has achieved price stability, and he remained committed to both policy mandates and will ensure monetary policy is independent. Chicago Fed President Austan Goolsbee called June inflation "encouraging" but said one month's data is insufficient to signal a return to 2% inflation. Concerns about the ongoing Middle East conflict and Strait of Hormuz supply lifted oil though President Donald Trump dropped a proposed shipping fee in favor of more Gulf deals.
Risk sentiment was supported by strong earnings from major U.S. banks and upbeat guidance.
DXY slid with yields after CPI but held above the July low at 100.55 as dip buyers emerged ahead of Warsh's remarks.
Implied volatility softened across the curve, leaving DXY 1-month vol at 5.4% with risk reversals retaining a modest bullish bias.
Commodity currencies outperformed, aided by lower yields, higher oil prices and an upbeat risk backdrop after strong bank earnings.
The loonie posted one of its best days of the year on short covering before Wednesday's Bank of Canada policy decision. EUR/USD rallied to 1.1463 before pulling back below its 21-DMA of 1.1426, leaving support at 1.1378 vulnerable unless it tops the 1.1472 July high. GBP/USD retained a mildly bullish bias above 1.3367 post-CPI pullback low, with a close above converging moving averages near 1.34 opening the door to 1.3488. USD/JPY rebounded from Tenkan-sen support at 161.60 and reclaimed its 21-DMA at 161.80, keeping a bullish outlook toward the 162.84 YTD high intact as long as its 21-DMA holds on a closing basis. AUD/USD climbed above its 21-DMA at 0.6947 to a three-week high before easing, with a break of 0.7010 exposing the 2025 peak near 0.7055.
Treasury yields were down as much as 5 basis points as the curve steepened. The 2s-10s curve jumped about 4 basis points to +38.6bp.
The S&P 500 rose 0.44%.
WTI oil gained 1.8% on Middle East supply worries.
Gold and copper rose 1.3% as the dollar and yields fell. Heading toward the close: EUR/USD +0.38%, USD/JPY -0.14%, GBP/USD +0.22%, AUD/USD +0.80%, DXY -0.29%, EUR/JPY +0.22%, GBP/JPY +0.09%, AUD/JPY +0.69%(Editing by Burton Frierson Robert Fullem is a Reuters market analyst. The views expressed are his own)
