Talking Points

- The miss on the inflation report comes just weeks after Fed raised concern about inflation undershooting at its July FOMC meeting.

- Improving labor markets and record high confidence levels have done little to bolster demand, push inflation higher.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

After an all-around solid July US Nonfarm Payrolls report last Friday, it appeared that some momentum may have been gathering for economic data to stabilize and the US Dollar to hit the brakes on its decline. Yet the US Dollar can’t seem to catch a break as the US economy can’t seem to string together several strong data releases in a row.

Headline CPI actually gained to +1.7% from +1.6% (y/y), but it fell below expectations of a +1.8% reading (y/y). Core inflation wasn’t any better, also at +1.7% (y/y). These figures remain below the Fed’s +2% medium-term target, and echo the concerns the Fed raised at its July FOMC meeting.

The data comes against the backdrop of a Federal Reserve looking for more evidence that the US economy is moving along in the right direction before it announces its next rate hike. Persistent underperformance in inflation could ultimately lead to the Fed delaying its rate hike and balance sheet normalization plans later on this year.

The data today has had animpact on interest rate expectations, with March 2018 Fed rate hike expectations falling signficantly over the past five days. At their peak this week, Fed funds futures contracts were pricing in a 58% chance of a 25-bps by March; after today’s data, March rate hike odds are below 53%.

Here are the data driving the US Dollar this morning:

- USD Consumer Price Index (JUL): +1.7% versus +1.8% expected, from +1.6% (y/y).

- USD CPI ex Food & Energy (JUL): +1.7% as expected, unch (y/y).

See the DailyFX Economic Calendar for Friday, August 11, 2017

Chart 1: DXY Index 1-minute Timeframe (August 11, 2017 Intraday)

US Dollar Rebound Fizzles Out after July Inflation Report Falls Short

Following the inflation report missing on the headline, the US Dollar was hit across the board. The Dollar Index (DXY) dropped from 93.45 to as low as 92.99 following the release, and was trading back at 93.12 at the time this report was written. Similarly, EUR/USD jumped from near 1.1765 to above 1.1810, and USD/JPY dropped from near 109.20 to below 108.70 briefly.

With a dry calendar the rest of the day into the weekend, attention will turn to the newswires where tensions continue to build between North Korea’s Kim Jung-Un and the United States’ Donald Trump.

Read more: Global Risks Jump as USD/JPY Cracks, S&P 500 Marks Key Reversal

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mailcvecchio@dailyfx.comFollow him on Twitter at@CVecchioFXTo be added to Christopher's e-mail distribution list,please fill out this form

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