US dollar nears two-month low ahead of inflation data as weak jobs report reshapes Fed expectations

The US dollar index slipped to 99.6 on August 10, hovering at its weakest level since early June, after a July jobs report that landed like a cold bucket of water on rate-hike expectations. Investors are now staring down the barrel of this week’s Consumer Price Index release, which could either confirm the economy’s cooling trend or complicate the Federal Reserve’s next move considerably.

The greenback’s slide follows a nonfarm payrolls report that didn’t just miss expectations. It drove right past them in the wrong direction. The US economy shed 23,000 jobs in July, a jarring contrast with the consensus forecast calling for a gain of 80,000. The unemployment rate ticked up to 4.1%, adding another data point to a picture of softening labor conditions.

Rate hike odds tumble after payrolls miss

Before the jobs data dropped, futures markets were pricing in a roughly 67% probability that the Fed would raise rates at its September meeting. That number has since cratered to approximately 44%.

The repricing was swift and broad. The 10-year Treasury yield fell to 4.637%, reflecting a bond market increasingly skeptical that the central bank has another hike in the chamber.

The euro, meanwhile, climbed to $1.1558, its strongest position since mid-June. When the dollar weakens, the euro often plays the role of primary beneficiary among major currencies, and this time was no exception.

All roads lead to Wednesday’s CPI

The July Consumer Price Index, scheduled for release on August 12, is now the single most consequential data point for near-term monetary policy. Forecasters expect core CPI, which strips out volatile food and energy prices, to rise 0.2% month-on-month. If that number holds, it would push the annual core inflation rate down to 2.5%, a step lower from June’s 2.6% reading.

The spread between market pricing (44% chance of a September hike) and the previous consensus (67%) represents a meaningful gap in expectations. That gap will narrow quickly once CPI data arrives, and the direction of the resolution will set the tone for dollar positioning heading into the fall.

Traders are essentially placing their bets on a binary outcome this week. Either the inflation data confirms the economy is cooling on multiple fronts, giving the Fed cover to pause, or it introduces enough doubt to keep the hiking cycle alive. Given the stakes, Wednesday’s 8:30 AM release is shaping up to be one of the most closely watched data drops of the summer.

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