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Talking Points:

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- FX Markets have been active this morning, as a decline in USD is reversing after the release of July CPI; but the driver here probably has less to do with the in-line CPI print and more with comments from New York Fed President, Mr. William Dudley.

- Mr. Dudley has provided numerous pieces of market-moving commentary over the last year, but this morning’s comments harken back to May, when the Fed talked up the prospect of higher rates at their meeting in the next month. With FOMC minutes from the most recent meeting set to be released tomorrow, the US Dollar may have ammunition to continue this top-side move into that release.

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The major event from the overnight session was a fairly pronounced bout of US Dollar weakness. Some sources were calling this a ‘crash’ but in actuality the move had tallied around a -.8% decline on the day peak-to-trough, which should not fit any definition of a ‘crash.’ Making matters more interesting is the fact that the bulk of this decline came-in well ahead of the release of U.S. CPI for July.

There is, however, something else that is likely setting those alarms off and that’s the strength that has been seen in the Yen from the overnight session, and there wasn’t even necessarily a directly attributable catalyst for this price action. USD/JPY broke below the vaulted ¥100.00-psychological level as Yen-strength raged through the Asian and European sessions, amounting to a -1.7% decline in the pair.

Dudley Dialog Drives the Dollar After In-Line CPI Print

Created with Marketscope/Trading Station II; prepared by James Stanley

Once CPI printed in-line with estimates and unchanged from July, the USD drop began to reverse; but this may not have been entirely-related to that CPI print, as around the same time we saw New York Fed President, William Dudley, drop comments denoting that a rate hike in September is on-the-table for the Federal Reserve.

Mr. Dudley had echoed the sentiment from the April FOMC meeting in which the Fed said that they felt markets were underpricing the probability of a hike in the following month. This led to a month of strength in the Greenback as investors factored in that slightly-higher probability of near-term rate hikes. And just as we saw in April, the most recent Fed statement took a slightly more-hawkish tint towards monetary policy moving forward, as the Fed removed a key phrase from their most recent statement, saying ‘near-term risks to the economic outlook have diminished.’

With the release of Fed minutes from that most recent July meeting set to be released tomorrow at 2PM ET, markets may have a driver to look for a continued reversal in the U.S. Dollar. On the chart below, we look at this morning’s USD reversal after the release of CPI and as those comments from Mr. Dudley made their way into markets:

Dudley Dialog Drives the Dollar After In-Line CPI Print

Created with Marketscope/Trading Station II; prepared by James Stanley

This wouldn’t be the first time that Mr. William Dudley had provided compelling, market-moving commentary. Back in February, Mr. Dudley’s commentary was key in re-setting market expectations around the Fed’s rate hike trajectory, and during the major equity declines in August of last year he had provided multiple comments to help support stock prices.

--- Written by James Stanley, Analyst for DailyFX.com

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