Key facts
- US inflation cooled to 3.5% year-over-year in June.
- Core inflation slowed to 2.6% year-over-year in June.
- Monthly CPI fell 0.4% in June, the first decline since April 2020.
- Falling energy prices contributed to the inflation slowdown.
- Market expectations for a Federal Reserve rate hike decreased significantly.
- Renewed US-Iran conflict has pushed oil prices higher, posing inflation risks.
U.S. inflation cooled more than expected to 3.5% year-over-year in June, with the headline consumer price index falling 0.4% monthly, the first decline since April 2020. This slowdown was primarily driven by retreating energy prices. Core inflation also eased, dropping to 2.6% year-over-year from 2.9% in May.
The softer-than-expected inflation data has significantly reduced market expectations for a near-term Federal Reserve rate hike. Traders now see only a 16% chance of a July hike, down from previous expectations. Bond yields fell, with two-year U.S. Treasury yields dropping 9 basis points from a 16-month high.
FX strategist Sim Moh Siong of OCBC noted that the downside surprise gives the Fed more scope to remain on hold, potentially constraining near-term USD appreciation. However, optimism is tempered by renewed conflict in the Iran-US hostilities, which has pushed oil prices back to one-month highs and revived inflation risks. CBA economists cautioned that one month of softer CPI data will not entirely rule out future interest rate hikes.
The dollar weakened against a basket of peers, with the US Dollar Index falling to 100.81. The euro and British pound each gained 0.1%, while the New Zealand and Australian dollars also saw strength.