US inflation data triggers speculation that the Fed may only raise interest rates once more this year.

The release of the US inflation report tonight (July 12) was a negative catalyst that caused the US Dollar to plummet against its major rivals in the Forex market. The US Dollar Index (DXY) slumped by approximately 0.7% to 100.95 shortly after the event, hitting its lowest since mid-April.

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US inflation for core goods only grew by 0.2% (month-over-month) in June 2023. This figure reflects a significant slowdown compared to the 0.4% growth in the previous month, and it missed the consensus expectation of 0.3%.

The annualized core inflation rate also dragged down from 5.3% to just 4.8%, falling short of the estimated 5.0%. The annual inflation rate for all goods experienced an even sharper decline from 4.0% to 3.0% during the same period.

This data series confirms a broad-based slowdown in inflation, signaling that the Fed's monetary tightening cycle is nearing its end. The data also sparks speculation that the Fed may only raise interest rates once more this year instead of the previously suggested two hikes.

The latest data indicates that most market participants believe the Fed will raise interest rates by 25 basis points at the FOMC meeting on July 25-26. However, there is only a 25% chance of another rate hike after that.

 "The Fed may have talked itself into a corner with a July 26th rate hike. The data don't confirm that they need to actually hike," said Brian Jacobsen, chief economist at Annex Wealth Management, in Menomonee Falls, Wisconsin. "Since they're stubborn, they'll probably do it anyways. Thankfully the market has been expecting that hike. The end is near for hikes." 

The decline in expectations for Fed interest rates has harmed the greenback. AUD/USD and NZD/USD rallied by around 1.2%, EUR/USD surged by over 0.7%, and GBP/USD reached its highest level since April 2022. USD/JPY plummeted by nearly 1% to return to the range of 139.00, which it briefly occupied in early June.

More significantly, USD/CHF sank to multi-year lows around 0.8690. This represents the weakest exchange rate of the US dollar against the Swiss franc since the luxury watchmaker nation removed the EUR/CHF peg in January 2015.