Federal Reserve Governor Christopher Waller stated on Monday that if this week's core inflation data comes in high again, the Fed will need to consider raising interest rates soon.
He noted that the U.S. has seen inflation readings that are "higher, higher, higher, higher" for nearly five to six consecutive months.
"If we get another high number, I would take that as a signal, not as noise; but if the data comes in lower, given the string of high inflation months we've had, I might need another month or two of data to be confident that this is truly a signal."
Additionally, Waller commented on the Fed's dot plot, clarifying that while he cannot speak for the entire Federal Open Market Committee, he can explain the median interest rate forecast.
He suggested that the release of the dot plot projections be delayed until the day after the FOMC meeting, rather than being published on the same day as the policy decision.
Market pricing indicates that expectations for at least one Fed rate hike by September are almost fully priced in, with two hikes by the end of March next year also fully anticipated.
Separately, data released by the U.S. Labor Department showed that the U.S. Consumer Price Index for June fell by 0.4% month-on-month, marking the first monthly decline since 2020 and significantly better than market expectations.
Following the release of this data, the market widely believes that the Fed will have more time to observe the inflation trend without needing to take action on interest rates this month.
In response, U.S. Treasury prices rose across the board.
The yield on the 2-year Treasury note, which is most sensitive to monetary policy, fell by as much as 14 basis points to 4.14%, its largest single-day drop since last August, before paring some of the losses and closing down about 10 basis points.
Meanwhile, the three major U.S. stock indices generally rose, and the U.S. dollar weakened against all major currencies.
Zach Griffiths, Head of Investment Grade Corporate and Macro Strategy at CreditSights, said, "Today's inflation data essentially rules out a July rate hike by the Fed. While inflation remains above target and the situation in the Middle East continues to deteriorate, this data is sufficient for the Fed to remain on hold for now."
Data to watch today includes the U.S. Empire State Manufacturing Index for July, the U.S. Producer Price Index year-on-year for June, and Canada's Manufacturing Sales month-on-month for June.
Additionally, the Bank of Canada's interest rate decision and Monetary Policy Report scheduled for release this evening warrant close attention.
Gold/USD
Gold moved higher in a choppy session yesterday, briefly reclaiming the $1,800 level, and is currently trading around $1,780.
In addition to support from short covering and technical buying near the $1,750 level, the weaker-than-expected U.S. inflation data during the session, which dampened Fed rate hike expectations, was a key factor supporting the rebound in gold.
However, lingering tensions in the Middle East capped the upside for the precious metal.
Today, focus will be on resistance near $1,800, with support around $1,730.
AUD/USD
The Australian dollar edged higher in a volatile session yesterday, closing slightly up and currently trading around 0.6990.
Besides support from short covering, a weaker U.S. dollar index—pressured by the lower-than-expected U.S. CPI data which cooled expectations for a July Fed rate hike—also contributed to the Aussie's rebound.
Furthermore, positive economic data released from China during the session provided additional support for the currency pair.
Today, watch for resistance near 0.7100, with support around 0.6900.
USD/CAD
The U.S. dollar fell against the Canadian dollar in a fluctuating session yesterday, breaking below the 1.4100 level and hitting a 19-day low, currently trading around 1.4050.
The primary pressure on the pair came from a weaker U.S. dollar, which was weighed down by soft inflation data reducing Fed rate hike expectations.
Additionally, rising crude oil prices, supported by ongoing tensions in the Middle East, further pressured the pair lower.
Today, focus will be on resistance near 1.4150, with support around 1.3950.
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