
US CPI inflation came in very much in line with market expectations, not strong enough or weak enough to break the DXY Index out of its lower 99.4-100.1 range set after USD/JPY’s sell-off from the joint US-Japan interventions. The markets reduced the probability of a September Fed hike to 40% overnight from 72% at the end of July, driven by last Friday's negative nonfarm payrolls and slower CPI inflation readings. Headline inflation fell a second month to 3.4% YoY in July from its 4.2% high in May seen after Operation Epic Fury. Core inflation declined to 2.5% from 2.9%, returning to the January-February level before the US-Iran conflict. 
With average hourly earnings modestly lower, tracking core inflation amid a softer-than-expected labour market, Fed officials will likely be less concerned about a repeat of second-round effects of inflation that emerged after Covid 19. Hence, today’s PPI inflation readings are not likely to change the narrative ahead of the Fed’s Jackson Hole Symposium a fortnight away.
The greenback’s upside was also restrained by the worst US budget deficit since March 2021. The shortfall widened to $432 billion in July, reaching $1.8 trillion in the first 10 months of Fiscal 2026 (October 2025-September 2026), on track to exceed the Congressional Budget Office’s estimated $2.1 trillion for the whole fiscal year. The government’s coffers were limited by tariff refunds and a decline in corporate income tax and higher tax refunds from President Trump’s One Big Beautiful Act. Defence spending increased due to Trump’s war with Iran. America’s weakened fiscal position erodes the yield advantage of US bonds supporting the USD. Last week’s joint US-Japan interventions demonstrated the US Treasury Department’s concerns regarding interventions by Japan, the largest holder of US treasury holdings, to stabilize its yen.
Quote of the Day
” A house divided against itself cannot stand.”
Abraham Lincoln
August 13 in history
In 1961, East Germany closed the border in Berlin and began building the Berlin Wall. This barrier stopped people from leaving the communist east for the democratic west.



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