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U.S. inflation is high, but behaving.
The dollar softened across the board after U.S. inflation met analyst expectations, signalling the all-clear for the Federal Reserve to cut interest rates next week.
U.S. headline CPI inflation met analyst expectations with a 2.9% year-on-year print, although the monthly figure edged above expectations at 0.4% month-on-month (vs. 0.3% expected).
Following the release, the pound to dollar exchange rate rose to 1.3557, having been at 1.3515 in the minutes prior to the print.
Core CPI, which the Federal Reserve pays close attention to, was steady at 3.1%, which matched expectations.
For investors to reconsider their Fed bets and bid the dollar, inflation needed to exceed estimates. Instead, the on-target print eases fears that tariffs would significantly boost inflation and tie the Fed's hands.
"There wasn’t much in today’s report that will sway the Fed not to cut in September. Sure, inflation isn’t trending at 2% but that increasingly has to do with tariff-induced price rises. That is happening at the same time that the job market is in need of support, and an ailing job market implies more muted demand-side price pressures ahead," explains Ali Jaffrey at CIBC Capital Markets.
Last Friday's U.S. non-farm payrolls print underscored a poor run of job prints, while the latest weekly out-of-work claims data showed rose to 263K vs. the 235K expected.
The market is betting that the Fed can cut interest rates to help the labour market, without stimulating inflation.
"With the fed funds rate still well above the range of neutral estimates, a couple of cuts would still keep policy in somewhat restrictive territory to guard against persistent inflation risks," says Jaffrey.