June CPI Report: US dollar crashes as inflation slows down
Discover how the June CPI report revealing slowed inflation prompted a sharp decline in the US dollar across forex markets amid raised expectations of a possible Fed rate cut in September.
Key points
- June CPI inflation missed expectations by 0.1%, hitting 2021 levels
- US dollar depreciated against major currencies following the news
- USD/JPY saw the biggest move, down as much as 2% in the hours following
- A September rate cut from the Fed now appears overwhelmingly likely, per CME futures
CPI inflation rate fell to 3.0% in June
This morning, the release of June CPI data revealed the headline inflation rate in the US dropped to 3.0%, reaching its lowest mark since March 2021 and falling 0.1% more than analysts had anticipated. This significant decrease could signal a turning point in inflation trends, which has struggled to get below 3% despite aggressive rate hikes.
Core inflation hits 3.3%, lowest level since 2021
US core inflation, which excludes volatile food and energy prices, also fell unexpectedly by 0.1%, marking the third consecutive month of declines. Like headline inflation, this drop to 3.3% is its lowest level since 2021. This consistent move lower in the traditionally less volatile measure of inflation could be an even greater suggestion of a sustained easing of inflation pressures that could influence Federal Reserve strategies.
US dollar declines across the forex board
Immediately following the inflation miss, the US dollar experienced significant declines, dropping over 50 pips against major currencies like the GBP, EUR, and JPY. This movement indicates that traders are anticipating potential interest rate cuts by the Fed in response to the easing inflation. Such a policy change would lower yield on the dollar overnight, and possibly fuel greater moves in other asset classes, spurring a flock out of USD investment.
USD/JPY crashes 2%, more than 300 pips
The USD/JPY pair saw the most dramatic move—a drop of more than 300 pips in the hour following, falling below the 160.00 level. Midday the exchange rate has stabilized, with USD/JPY trading near 158.50. The move is significant, not only because it relieves the Bank of Japan and the yen, which has been hovering at 38-year lows (USD/JPY above 161.00) for the past week, but also because it reflects historical patterns. USD/JPY has demonstrated notable correlation to US Treasuries among USD pairs in recent years. When the US finally begins lowering interest rates, the rate differential between the US and Japan will shrink from over 5% which has attracted USD investors.
Significant chance of Fed rate cut in September
Following this inflation data, interest rate futures from the CME are now indicating a nearly 93% chance of a Federal Reserve rate cut at the September FOMC meeting. This probability has jumped almost 20% from yesterday, and 40% from a month ago. The same markets are also now predicting an additional 25-50 bps of cuts by the end of the year, despite the latest guidance from the Fed signaling a single cut by December. Such a move reflects the market's agility to adjust to economic indicators and anticipate the central bank's response.
How to trade US dollar
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions on USD pairs
Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.
Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.