Dollar erases CPI data-sparked losses, inches up amid Hormuz uncertainty

The U.S. dollar on Wednesday bounced back from a session low to tick higher, as ongoing uncertainty over a Middle East peace deal offset an in-line July consumer inflation report that reduced odds of Federal Reserve rate hike expectations. 

The dollar had strengthened in recent sessions as investors raised expectations for tighter monetary policy, but the latest inflation data failed to deliver the upside surprise needed to extend that move.

At 14:44 ET (18:44 GMT), the U.S. dollar index, which tracks the greenback against a basket of six major peers, was up 0.2% to 99.98. The gauge had initially extended losses after the inflation data was released in the morning, hitting a session trough at 99.61, then recovered and pushed higher before midday.

Headline and core consumer inflation moderate on Y/Y basis  

On Wednesday, currency market participants were squarely focused on the July consumer price index (CPI) report for further cues on monetary policy outlook. The data came after a weaker-than-expected July jobs report on Friday led to a rapid recalibration in Fed rate hike odds for September.

As per the U.S. Bureau of Labor Statistics, headline CPI ticked up 0.1% M/M in July, after falling 0.4% in June, while cooling on a Y/Y basis to 3.4% from 3.5%. Core CPI, which strips out food and energy, increased 0.2% M/M, after a flat reading in June, while also decelerating on a Y/Y basis to 2.5% from 2.6%. All four measures matched expectations.

CPI will be followed by July producer price index (PPI) figures on Thursday. While both indicators are widely followed, the Fed prefers to track the personal consumption expenditures (PCE) price index to gauge inflation. Components from CPI and PPI feed into the PCE.

For the Federal Open Market Committee (FOMC), the in-line readings likely give it more breathing room to hold interest rates steady instead of hiking, especially after the weak jobs report on Friday. Interest rate odds reflected such a move, with the CME FedWatch tool showing chances of the FOMC holding steady in September ticking up to 62% after the CPI report from 54%. Higher rate environments tend to strengthen the dollar.

"The big surprise with a report that had no surprises (all of the data came perfectly in line with the estimates) is that a situation where inflation isn’t reaccelerating, coupled with the most recent, weak jobs report gives the Fed more time to wait. Typically, the market would be buoyed by the thought of rate cuts, but in a world where many are expecting rate hikes, anything that can delay – or squash the need for – rate hikes will be viewed positively," Chris Zaccarelli, chief investment officer at Northlight Asset Management, said. 

The market and the Fed won’t stop worrying about inflation, and there are another set of reports before the next Fed meeting, but these two reports (Jobs and CPI) are going to go a long way toward keeping the bulls running in the near term," he added.

Wall Street indeed had a largely positive response to the CPI data as well, with the benchmark S&P 500 index last up 0.4%. 

Read more reactions to CPI here.

Brent hovers near $90 as Hormuz tensions persist

Turning away from the economic calendar and to the Middle East, oil prices fluctuated on Wednesday amid more mixed messaging on the Strait of Hormuz. Brent crude futures, the global benchmark, briefly touched $90 a barrel.

There appeared to be little progress towards a peace deal to reopen the critical strait, with both the U.S. and Iran continuing to claim control over the vital waterway.

"The U.S.A. has total control over the Strait of Hormuz," Trump said on his Truth Social service.

Earlier, Iran’s state media on Tuesday said the country had reiterated its demands that the U.S. cease hostilities across all fronts and release frozen assets before the strait could be reopened, citing comments made by security council chief Mohsen Rezaei to the Chinese ambassador to Tehran.

"The Strait of Hormuz won’t open until the U.S. changes behavior and accepts Iran’s conditions. Any Iran-Oman transit agreement is a separate matter from the closure of the Strait," Rezaei said, according to state media.

While Kpler data showed a modest rise in confirmed vessel crossings through the strait on Tuesday, the overall mood remained one of caution, compounded by fresh attacks. Houthi rebels reported an attack on commercial shipping in the Bab el-Mandeb Strait that killed four cargo-ship crew members and two Yemeni rescuers, while the U.S. disabled a Panama-flagged vessel near the Gulf of Oman.