The US Dollar has been trading in a rather mixed fashion. This indecision stems from a clear rotation happening in the equity markets. With the Fed likely to cut interest rates in September, a strategic shift is underway. Investors are moving away from the tech giants, pivoting towards smaller stocks and blue chips in niche sectors, as the latest CPI report brought some significant news. Annual headline inflation has decelerated to 3%, while core inflation, which strips out the volatile food and energy sectors, sits at 3.3%. This represents a meaningful drop and hints that the inflationary pressures we saw earlier this year might have been transient. The headline inflation even deflated on a monthly basis for the first time in four years, bolstering confidence that US inflation is on track to hit the Fed's 2% target.

Such softer-than-expected inflation figures have put the USD under pressure. The USD Index (DXY) experienced a notable drop on Thursday post-CPI release then recovered slightly by the end of the trading session. However, the decline resumed on Friday as the sell side of the market apparently took advantage of the momentum, targeting solid technical levels like 104.00:

Market sentiment is shifting as Fed officials grow more confident that disinflation is well underway. San Francisco Fed President Mary Daly’s recent comments underscore this, suggesting that one or two rate cuts could be appropriate this year given the cooling inflation and easing labor market. Interest rate futures are reflecting this sentiment, with an 86.5% probability of a 25-basis-point cut in September.

Traders will be keenly watching the Producer Price Index for June, which will provide insights into whether producer prices are also following the disinflationary trend seen in consumer prices. If the PPI also shows signs of disinflation, we could see the DXY testing the 104.00 level again, with a potential for further decline if traders decide to cut their losses.

Additionally, the University of Michigan’s preliminary readings for July on Consumer Sentiment and inflation expectations are due later today.

Across the pond, GBP is showcasing remarkable strength against its peers. The latest UK GDP data for May, which came in at 0.4% (beating estimates of 0.2%), raises questions about whether the BoE should pivot towards policy normalization come September. Also, the political landscape in the UK has stabilized significantly following Keir Starmer’s Labour Party victory in the parliamentary elections. This newfound stability is attracting foreign inflows, bolstered further by the UK’s new Chancellor, Rachel Reeves, who is focused on stimulating growth and investment, particularly on the supply side. The improved economic outlook and reduced expectations for the Bank of England (BoE) to cut rates in August have made the GBP more attractive. However, in the near term there is a high probability of a profit-taking move before potential further upside as the price approaches the key horizontal supply line: