The US dollar is treading water on Thursday, struggling to build on its post-CPI bounce as softer-than-expected inflation data continues to weigh on bets for a Federal Reserve rate hike next month. The US Dollar Index (DXY), which tracks the greenback against a basket of major currencies, remains confined to a nearly two-week-old range and is edging lower during the Asian session, unable to sustain momentum beyond the psychological 100.00 mark.
What the Inflation Data Showed
Wednesday's Consumer Price Index report showed inflation continued to moderate in July, with the headline reading matching economists' expectations. CPI rose 3.4% year-over-year in the 12 months through July, down from 3.5% in June, while core CPI — which strips out volatile food and energy prices — increased 2.5% over the same period, down from 2.6% the month before. The in-line reading eased concerns that a hotter-than-expected print could reinvigorate hawkish rate expectations.
Rate-Hike Odds Continue to Fall
The soft inflation data compounds a shift already underway since last Friday's jobs report showed the US economy unexpectedly shed jobs in July. Fed funds futures traders are now pricing in roughly 40% odds of a September rate hike, down from 44% just before Wednesday's CPI release and from 55% a week earlier — a notable pullback in hawkish positioning over a short span.
Oil Prices Keep a Floor Under the Dollar
Even as rate-hike bets recede, the dollar isn't falling freely. Traders remain wary of inflation risks stemming from volatile oil prices tied to the ongoing US-Iran standoff, which has kept a floor under the currency despite the disinflationary CPI signal. That dynamic was visible in currency pairs like EUR/USD, which has treaded water in a narrow range for more than a week as oil prices rise amid continued uncertainty over the reopening of the Strait of Hormuz.
The Bigger Picture: A Fed Without Forward Guidance
The uncertainty is compounded by the Fed's current approach under Chairman Kevin Warsh, who has moved away from offering explicit forward guidance on the central bank's next move. That's left markets more reactive to each new data point than usual, with analysts describing the coming September 15-16 policy meeting as a genuine toss-up between a hold and a hike, rather than a foregone conclusion in either direction.
What to Watch Next
With rate-hike odds now hovering closer to even, markets are likely to stay highly sensitive to incoming data — including any further inflation readings before the September meeting, oil price swings tied to the Strait of Hormuz standoff, and fresh commentary from Fed officials. For live dollar index tracking and rate expectations, see CME Group's FedWatch Tool.
For now, the dollar's message is one of hesitation — not falling sharply on the cooling inflation data, but not finding a clear catalyst to push higher either, as traders wait for the next piece of the puzzle before committing to a direction.