USD INDEX: WEAKNESS BELOW 2023 LOWS AT 100.82 WILL POINT TO A FURTHER 2-3% DROP IN COMING MONTHS – SCOTIABANK

The USD is trading defensively ahead of the US CPI report. Economists at Scotiabank analyze the greenback’s outlook.

Slowing inflation to weigh on the USD 

CPI is expected to reflect a sharp fall in headline prices in June year. The consensus call is for a drop to 3.1%, with prices rising 0.3% in the month. But a number of Wall St banks are looking for a milder 0.2%-ish rise in headline inflation that will pin inflation back to 3%.

Even if core prices growth remains slower to decelerate (forecast at 5.0% YoY, from 5.3% in May), markets may find some comfort in a low core MoM read (a 0.2% MoM gain would be the lowest since 2021). 

Slowing inflation – and thoughts of perhaps a 2-handle on headline CPI in the next few months – will encourage market expectations that the Fed may have little (or no) more work to do on monetary policy after the July meeting and weigh on the USD generally.

DXY is within reach of its 2023 lows (tested in January and April) at 100.82; weakness below this point will add to already strong bearish momentum and point to a further 2-3% drop in the index in the coming months to the 98/99 region.