USD INDEX: MORE WEAKNESS TO ACCUMULATE BELOW 101.75 – SCOTIABANK

USD edges lower ahead of expected uptick in headline inflation. Economists at Scotiabank analyze Greenback’s outlook.

Moderating core prices should soften the impact on the USD

The monthly rise in inflation is expected to be moderate, 0.2% MoM, but the pace of headline inflation is expected to push higher from June’s 3.0% to 3.3%. Core prices are also seen up 0.2% in the month but should slow to 4.7% (from 4.8%) in the year. 

Assuming 0.2% MoM gains between now and the end of the year, core CPI should still slow further by December (to around 3.5%). With policy settings restrictive, the Fed will be cautious about overtightening from here. 

Markets may find the jump in July headline prices difficult to digest but the risk of an uptick in the next few months has been well signaled and should not be too surprising for market participants. Moderating core prices should soften the impact on the USD.

The DXY still looks to be reflecting broader selling pressure on the USD building in the 102.50/102.75 area and developing losses today leave support around 101.75 potentially exposed. Expect more USD weakness to accumulate below here