The US dollar loses steam amid soft data (Daily analysis 11.08.2023)

In the first part of August, the US dollar's weakening trend was jeopardised. This happened when the EUR/USD exchange rate started to breach the zone around 1.09. The weak readings, first of the employment change and then yesterday of inflation, have reduce the chances of the Fed continuing with its rate hikes. As a result, the EUR/USD exchange rate rebounded from the critical barrier. At the same time, quotations did not break through the ceiling of the past two weeks, i.e. the ceiling of 1.1050 closing the way to July's long-term highs. This suggests the continuation of chimerical, choppy trading and the absence of a clear path for the US currency.

In July, US consumer inflation accelerated from 3.0 to 3.2% year-on-year. Nevertheless, Thursday's readings support the view that interest rates in the world's largest economy will not rise from the current range of 5.25-5.50% after the summer holidays. Moreover, decelerating price growth and a weakening economy at the end of the year should weigh heavily on the US dollar.

Month-on-month consumer prices rose by no more than 0.2% for the third consecutive month, and annual CPI growth came in slightly below expectations. Yet, more significantly, core inflation slowed from 4.8 to 4.7% year-on-year. In June, monthly price growth excluding food and energy was the lowest since February 2021 and for the first time this year, it was weaker than forecast. In July, core inflation was again 0.2% month-on-month. Unlike a month ago, this was not helped by the cost of rents and housing, which have an approximately 40% impact on the index value. Increases in this category were offset by changes in the prices of second-hand vehicles, airline tickets or healthcare costs.

Regardless of the structure, if price pressures were to maintain their current strength for longer, the Fed would be on the fast track to achieving its inflation target. The Federal Reserve has made the need for further interest rate increases dependent on information coming out of the economy. Employment change over the past two months has been disappointing. The gain in non-farm payrolls of around 185,000 was the worst since late 2020.

Similarly, for the second time in a row, the inflation report provides arguments for those opposing the continuation of rate rises. Conotoxia's currency forecasts assume that in the near term, the dollar exchange rate will remain near its current level. Continued deceleration of inflation and a gradual deterioration of the economy towards the end of the year should arouse speculation of rapid interest rate cuts in the US. We expect the EUR/USD pair to be back around 1.12 by the end of the year and to reach 1.15 by mid-2024.