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The US dollar has undergone a correction following the release of the recent US CPI report. This correction has seen the dollar index retreat towards the 104.00 level, reflecting a shift in sentiment among traders.

Initially, the yen appeared to be the main beneficiary of lower US yields, with USD/JPY dipping to a low of 153.60 overnight. However, savvy traders have since driven a pullback of over 100 pips.

It's worth noting, however, that May CPI  provided an opportunity for undershooting another high base. Unless we witness a substantial drop in the monthly run-rate of inflation, inflation may stall or even begin to drift higher again, dragging US yields along with it.

While there's a sense of deflation in the air, and many indicators in the CPI are pointing towards easing inflation, we won't have a definitive answer until next month's inflation data. Similarly, the drop in PPI and CPI components factoring into the PCE have already been priced in. This leaves the FX market at the mercy of tier-one economic data, where recently established short dollar positions are hoping for alignment with the weaker survey data.

Consequently, there's a good chance we could continue to trade within current ranges for the rest of the month, although my view leans towards a weaker US dollar.

Rate cut expectations have already shifted significantly, with a September rate cut fully priced in, and a second cut fully priced in by December. To truly move the needle towards a weaker US dollar, we would need to see increased odds of a July rate cut or pricing in of a November cut, which could occur if US labor market data continues to decline.

Shifting our focus to the Japanese yen, Japan's release of weaker-than-expected GDP for 1Q24 was somewhat anticipated due to the effects of recent earthquakes.

However, profit-taking on short dollar positions has set in as the US releases its usual weekly jobless claims, housing starts, and permits data. A flurry of Fed speakers today may dampen the market's enthusiasm for rate cuts.

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