Inflation in the US will not stand in the way of the Fed's September rate cut. The US dollar is a hair's breadth away from this year's lows

The consumer prices in the US rose by 0.2% m/m in July. As a result, CPI growth slowed from 3.0 to 2.9% y/y. Core inflation also slowed to a new cyclical low of 3.2% y/y. The monetary authority's key indicator, excluding food and energy, also rose by 0.2% m/m. With this value in the medium term, the Fed's target is being met. Today's readings are in line with forecasts. The latest data will definitely not stand in the way of the Federal Reserve moving quickly to start cutting interest rates from the highest range of 5.25-5.50% in more than two decades. The easing becomes necessary in the light of the ongoing worsening condition of the labour market. The unemployment rate rose to 4.3% in July and is already 0.9 percentage points away from its cyclical lows.

The labour market sent a strong recessionary signal, which triggered the market to panic. Fear for the US economy's prospects strongly shook the US dollar and led to a deepening of the summer slump on Wall Street and global stock markets. Investors even began to fear that the longer-than-average time between the last hike and the inauguration of easing would push the economy into a deep decline. Subsequent macroeconomic data, including a marked improvement in service sentiment, eased the anxiety somewhat, ruling out the need for rescue cuts between scheduled meetings. The S&P 500 Index has rebounded by more than 6% since the plunge bottom, but the USD cannot shake off the weakness.

The myth about the unique resilience of US consumers to high interest rates has collapsed. Markets are pricing that the Fed will cut the rates at three meetings this year by a total of 1 full percentage point. Currently, the pricing of the cuts is almost 40 percentage points higher than at the end of July. Changing perceptions of the outlook for the economy and Fed policy have caused the US dollar to lose nearly 2% against the euro in the first half of August. The EUR/USD pair is just a hair away from this year's highs and is above 1.10.

The US currency may have fallen out of favour for good. The US dollar is not helped by uncertainty about the state of the US economy. Investors may also be concerned that the scale of the upcoming interest rate cut by the FOMC will exceed 25 bps. On the other hand, the potential for a near-term continuation of the USD sell-off should be limited by the discount indicating that the FOMC will cut rates by 200 bp in the next 12 months and probably an underestimation of the chances of Donald Trump returning to the White House. Bookmakers are pricing the Republican candidate's chances at 45 per cent, with fintech Conotoxia forecasting that EUR/USD will be in the current vicinity of 1.10 at the end of September and end 2024 at 1.11.