FX Daily: Dollar Bears Chase Totality

Dollar bears will be hoping that today's US July CPI release is soft enough to banish expectations of a September rate hike from the Fed. If so, that would unlock a benign drop in the dollar and keep risk assets broadly supported

USD: Dollar bears are hoping CPI will deliver

Friday's soft US jobs data did not weigh heavily on the dollar. The prevailing view here is that inflation trends will primarily drive the next Fed move. These are on show today in the form of the US July CPI release. Here, consensus is looking for a reasonably subdued set of numbers: 0.1% month-on-month for headline and 0.2% for core. These would see the year-on-year rates drop to 3.4% and 2.5% respectively – inching closer to the Fed's 2% inflation target. Driving the softer numbers are expected to be lower gasoline prices, broadening signs of rental deflation and soft wages.

Given the market looks to be expecting a softer price story today, we would probably need to see a 0.1% month-on-month read on core inflation – which some think is possible. A soft number should drag market pricing of a September Fed rate hike away from a 50% probability in favour of no change. And a bullish steepening of the yield curve should see the dollar soften – particularly against the procyclical currencies. On the US yield curve, our rates strategy team warns that the long end could also see some pressure from the fiscal side as the US budget deficit deteriorates on tariff rebates.

The above should be positive for the risk environment. Additionally, talk is emerging that President Trump could be trying to launch a cut in the Capital Gains Tax ahead of the midterms in early November. That would prove a mild dollar negative from a pro-risk perspective, but again we should monitor how the long-end of the Treasury curve would take more unfunded tax cuts and also whether this could tip the Fed over the edge into tightening.

For today, let's see whether a soft CPI print can break DXY to the downside from its 99.40-100.00 trading range.

Chris Turner

EUR: High energy the problem

EUR/USD continues to trade in a lacklustre fashion. Better hard activity data and eurozone economic numbers generally surprising on the upside have failed to provide the euro with much of a lift. That may be owed to unresolved tension in the Gulf, which is keeping European natural gas prices above €60/MWh. In terms of geopolitics, there is very little clarity here, although the latest reports suggest Pakistan and Oman are managing to bring the US and Iran a little closer together.

If the US CPI number does indeed come in on the soft side, EUR/USD should be able to challenge last week's high at 1.1580. That is about the extent of a move priced into one-day straddle options. Much more of a move may be too much to ask in quiet summer markets, given we will also see another round of CPI and jobs data – plus the Jackson Hole Fed symposium – before the Fed decides on policy mid-September.

Chris Turner

CEE: Geopolitics keeps rates under pressure

In Romania, July inflation released this morning showed the first signs of easing, with headline inflation falling from 10.4% to 8.2% YoY, the lowest level since mid-2025. However, the drop mainly reflects base effects, while month-on-month momentum shows no clear slowdown. We expect inflation to keep declining, but the National Bank of Romania is unlikely to cut rates before early 2027.

Elsewhere in the region, today’s calendar is quiet, leaving core markets and geopolitics in focus. Rates sold off sharply at yesterday’s open, led by the Czech market, before signs of US-Iran negotiations brought some relief. Even so, pricing remains hawkish, with almost three rate hikes priced in for the Czech Republic and two for Poland.

While this is not the first sell-off triggered by the US-Iran escalation, CEE rates are underperforming core markets more visibly this time. We think the market has moved too far in pricing tightening, but higher rates should offer some FX protection and support a return to more stable currencies, as seen at the start of the conflict. We expect some recovery in the koruna and zloty, which saw the sharpest rate moves yesterday, while the forint is likely to remain under pressure from local energy supply concerns.

Frantisek Taborsky

BRL: Politics finally lands

In an otherwise supportive market for FX carry trades, the Brazilian real was a notable under-performer yesterday. Driving that was both a sell-side bank downgrading Brazilian equities to neutral from overweight, and a new poll result ahead of Brazilian presidential elections in early October. This showed incumbent President Lula opening up a 9% lead over his rival, Flavio Bolsonaro.

This seems the first day that politics has really started to hit the real this year. We would not chase the real lower, however. 13.4% implied yields through the one-month non-deliverable forwards and Brazil's position as a net energy exporter should keep the currency reasonably in demand. Positioning is probably quite crowded long the real now, but we suspect it would require a broadly stronger dollar, rather than local news, to send USD/BRL through 5.22.

Chris Turner