Today’s Market Outlook
Focus on Whether U.S. CPI Gives the Dollar a Clear Direction
■ Market Summary
The main focus today is the July U.S. Consumer Price Index (CPI).
The market expects headline CPI to rise 3.4% year-on-year, slowing slightly from 3.5% previously. Core CPI is expected at 2.5% year-on-year, compared with 2.6% previously. Both are expected to show only a modest 0.1 percentage-point slowdown.
As this is a highly important indicator, even a small deviation from market expectations could trigger a sensitive reaction in the dollar.
The latest U.S. employment report was weak. Although the dollar initially fell after its release, it later recovered, with USD/JPY rising back into the 159 range.
The key question is whether today’s CPI will renew dollar strength or instead shift the market back toward dollar weakness.
■ USD/JPY
USD/JPY is trading around 159.35 in early London trading.
The pair rose to around 159.46 during the Tokyo afternoon, but has since encountered somewhat heavier upside resistance.
However, it remains above the previous New York close of around 159.28, indicating that USD/JPY is still holding near elevated levels.
The yen appreciation caused by last week’s coordinated Japan-U.S. intervention has been substantially reversed. However, as USD/JPY approaches the upper 159 range and 160.00, concerns about additional intervention are likely to increase.
If U.S. CPI is strong, rising U.S. yields and dollar buying could push USD/JPY toward 160.00.
At the same time, that scenario would intensify concerns over a possible response by Japanese and U.S. authorities. Sharp yen buying could therefore emerge during the advance.
■ U.S. CPI
Market expectations for today’s U.S. CPI are as follows:
Headline CPI, year-on-year
+3.4%
Previous: +3.5%
Core CPI, year-on-year
+2.5%
Previous: +2.6%
Both measures are expected to slow, but only by 0.1 percentage points.
It remains unclear whether the market will regard this as sufficient evidence of easing inflation.
If the results exceed expectations, expectations for a September FOMC rate hike could strengthen again.
In particular, an upside surprise in core CPI could reinforce the view that underlying inflation pressures remain strong, potentially lifting U.S. yields and the dollar.
Conversely, if both headline and core CPI fall below expectations, the market may focus on slowing growth and inflation following last week’s weak employment report, potentially restarting dollar selling.
■ Scenarios Following the U.S. CPI Release
Strong CPI
If persistent inflation is confirmed, expectations for a September rate hike may rise, supporting the U.S. 10-year yield and the dollar.
USD/JPY could test the upper 159 range and move toward 160.00.
EUR/USD would likely test the downside from the low 1.15 range.
Weak CPI
If inflation is slowing more than expected, expectations for a September rate hike could decline, increasing dollar-selling pressure.
USD/JPY could fall below 159.00 and move toward the 158 range.
EUR/USD could rise toward the upper 1.15 range.
In Line With Expectations
If both headline and core CPI match market expectations, the initial reaction could be limited.
In that case, attention may shift to the breakdown of the data, U.S. yield movements, Middle East developments, and oil prices.
■ September FOMC
Whether the Federal Reserve will raise rates at its September meeting remains a major focus.
Rate-hike expectations declined temporarily after the latest weak U.S. employment report, but the dollar has since been bought back.
Fed Chair Warsh has indicated that a rate hike remains possible depending on future inflation developments.
As the Fed has not provided clear forward guidance, markets are likely to continue adjusting interest-rate expectations in response to each economic release.
A strong CPI report could restore expectations for a September rate hike.
Conversely, if CPI is weak following the poor employment data, expectations for a pause are likely to strengthen further.
■ Dollar Markets
EUR/USD is trading around 1.1535 in early London trading.
After falling to around 1.1532 during the Tokyo afternoon, the pair has stabilized.
However, it remains below the previous New York close of around 1.1542, indicating a modest dollar-buying bias.
With the market awaiting U.S. CPI, major currencies are generally seeing limited moves.
An upside surprise in CPI could trigger broad-based dollar strength, while a downside surprise could lead to a rapid increase in dollar selling.
After the release, it will be important to monitor not only USD/JPY, but also EUR/USD and the U.S. Dollar Index.
■ Middle East Developments
The Middle East situation remains uncertain.
Regarding the reopening of the Strait of Hormuz, both the United States and Iran have presented their own conditions, and no clear agreement is in sight.
Concerns over oil supply have not fully receded, and oil futures have returned to unstable trading.
If tensions worsen, higher oil prices could renew global inflationary pressures.
As this could affect the monetary-policy outlook of the Federal Reserve and other major central banks, Middle East developments remain an important factor for the dollar.
■ Oil Market
NY crude oil futures are trading around $83.60.
Supply concerns remain because of uncertainty surrounding the Middle East, keeping oil prices near elevated levels.
Higher oil prices could lift U.S. inflation and tend to support U.S. yields and the dollar.
For Japan, however, higher oil prices increase import costs and can become a factor for yen selling.
As a result, rising oil prices can support USD/JPY through both dollar buying and yen selling.
If oil prices rise further after the CPI release, upward pressure on USD/JPY could increase.
■ U.S. Interest Rates
The U.S. 10-year Treasury yield is trading around 4.68%.
Although there has been no major directional move ahead of CPI, yields remain elevated.
A stronger-than-expected CPI report could push the U.S. 10-year yield higher and support dollar buying.
Conversely, weak CPI could lower U.S. yields as rate-hike expectations retreat, leading to dollar selling.
To assess USD/JPY, it will be important to monitor not only CPI itself, but also the immediate reaction in U.S. 2-year and 10-year Treasury yields.
■ Equity Markets
U.S. stock futures are rebounding in after-hours trading, while European equities are somewhat heavy.
If CPI slows at an appropriate pace, reduced inflation concerns and stable interest rates could support equity markets.
However, stronger-than-expected inflation could prompt selling in technology shares, as concerns over rising U.S. yields increase.
If equity-market reactions become substantial, they could also influence the yen through changes in risk appetite and risk aversion.
■ Today’s Key Economic Events
The main economic releases ahead are:
・U.S. Consumer Price Index
・India Consumer Price Index
・U.S. MBA Mortgage Applications
・Canada Building Permits
・Germany Current Account
U.S. CPI is by far the most important event.
For U.S. MBA Mortgage Applications, attention should also be paid to movements in the 30-year fixed mortgage rate.
If mortgage rates continue to rise, downside pressure on the U.S. housing market could intensify.
■ U.S. 10-Year Treasury Auction
A $42 billion U.S. 10-year Treasury auction is scheduled during the New York session.
As yields may move sharply after the CPI release, the strength of demand at the auction will also be important.
Weak demand could push long-term U.S. yields higher and support dollar buying.
Conversely, strong demand could restrain yield increases and reduce the momentum of dollar buying.
■ U.S. Weekly Petroleum Inventory Data
U.S. weekly petroleum inventory data will also be released.
As Middle East developments are making oil prices unstable, this release is receiving greater attention than usual.
A large drawdown in inventories could intensify supply concerns and push oil prices higher.
This could also support U.S. yields and the dollar through increased inflation concerns.
Conversely, an increase in inventories could weigh on oil prices and ease inflation concerns.
■ Corporate Earnings
Among major U.S. companies, Cerebras Systems’ earnings will be closely watched.
AI and semiconductor-related stocks continue to attract strong market attention, and the results could affect overall equity-market sentiment.
With U.S. CPI and corporate earnings arriving together, U.S. yields, the dollar, and equities could all see substantial moves during the New York session.
■ Key Points for the London and New York Sessions
① Whether headline U.S. CPI exceeds 3.4% year-on-year
② Whether core U.S. CPI exceeds 2.5% year-on-year
③ How expectations for a September rate hike change after CPI
④ Whether USD/JPY tests the upper 159 range and 160.00
⑤ Whether intervention concerns intensify near 160.00
⑥ Whether the U.S. 10-year yield rises into the 4.70% range
⑦ Whether EUR/USD can hold the low 1.15 range
⑧ Whether NY crude oil futures rise toward $84
⑨ The reaction of U.S. equity markets after CPI
■ Summary
Today’s July U.S. CPI is the most important market event.
The market expects headline CPI at +3.4% year-on-year and core CPI at +2.5%, both only 0.1 percentage points lower than the previous month.
Although the latest U.S. employment report was weak, dollar selling did not last, and USD/JPY has risen back into the 159 range.
If CPI exceeds expectations, September rate-hike expectations could strengthen again, potentially pushing USD/JPY toward 160.00.
However, following the Japan-U.S. coordinated intervention, concerns over additional intervention are likely to intensify rapidly as the pair approaches 160.00.
On the other hand, if CPI slows more than expected, rate-hike expectations could retreat further alongside last week’s weak employment data, potentially restarting the move toward dollar weakness.
NY crude oil futures remain in the $83 range amid uncertainty in the Middle East, leaving the risk of renewed inflation pressure in place.
The market will assess whether a new direction emerges in the dollar by monitoring CPI itself, U.S. yields, oil prices, equities, and changes in expectations for a September rate hike.
