Cooler inflation prints pressures US dollar
US inflation data has delivered a second downside surprise in as many days, adding pressure on the Dollar and easing fears of another Fed hike. Headline CPI came in below forecast on Tuesday, and June PPI followed on Wednesday with a 0.3% monthly decline, against expectations for a flat reading. Final-demand PPI slowed to 5.5% year over year, below the 6.2% consensus and down from 6.0%. Core measures also cooled, with PPI excluding food, energy and trade rising just 0.1% on the month. One print doesn’t make a trend, but back-to-back softer CPI and PPI reports give markets more reason to question how much tightening risk remains.
Energy again did much of the heavy lifting. Final-demand goods prices fell 1.4%, the largest decline since July 2022, led by a 6.4% drop in energy prices. Gasoline prices fell 12.0%, while diesel fuel, jet fuel and crude petroleum also moved lower. Food prices declined 0.6%, adding to the softer goods backdrop. Services were firmer, rising 0.2%, but not enough to offset the broader pullback in producer prices.
The PPI report reinforces the message from CPI that inflation pressure cooled in June. Core CPI was flat on the month, and core PPI excluding food, energy and trade rose only slightly after a much stronger May gain. That combination has helped markets move away from the idea of a July rate hike. Still, Fed Chairman Kevin Warsh has pushed back against any “mission accomplished” reading of the data. That keeps investors cautious, even as inflation surprises are finally moving in the Fed’s direction.
For the US Dollar, the data has shifted the short-term balance lower. Softer CPI and PPI reduce the appeal of chasing the Dollar on Fed hawkishness, especially as front-end yields and real yields adjust lower. The move looks more like a repricing of near-term Fed risk than a full breakdown in the Dollar backdrop. Inflation remains above target, energy risks have not disappeared, and the labor market is still holding up. Those factors should limit how far markets can price early easing for now.
Markets reacted by leaning further into a less hawkish Fed path. The two-year Treasury yield fell after CPI and remains sensitive to softer inflation data, even as yields have pared some of the initial decline following Warsh’s comments. The Dollar traded lower across major pairs as rate-hike expectations faded. Stocks found support from lower yields and a reduced risk of near-term Fed tightening. The next test will come from retail sales data and whether more Fedspeak reinforces that caution or allow markets to keep extending the post-CPI and PPI relief trade.
USD/CAD slips as US inflation cools
The Canadian dollar has gained ground against the US dollar after weaker-than-expected US inflation prints pushed the greenback lower and eased the recent rise in US yields. Softer CPI first drove the move, before PPI added to the same story with another downside surprise. Firmer oil prices have also helped, but the bigger driver for USD/CAD remains the US rate backdrop. Lower US inflation reduces the risk of a more hawkish Federal Reserve and eases pressure from yield spreads that had worked against the loonie over the past month.
The Bank of Canada left its policy rate unchanged at 2.25%, as widely expected. The decision did little to change the domestic policy picture, with the Bank still balancing a weak economy, trade uncertainty and higher headline inflation tied to oil. Policymakers continued to look through the initial energy shock, while stressing that they will not allow higher oil prices to feed into persistent inflation. The removal of language around possible consecutive hikes also gave the statement a less forceful tone.
The BoC still sees the Canadian economy operating with excess supply. Growth is expected to rebound in the second quarter, but the weaker first-quarter data forced a downgrade to the 2026 outlook. Soft core inflation, slack in the economy and trade uncertainty all point to a long hold rather than a near-term tightening cycle. Markets may still price some risk of a hike, but that looks hard to sustain if oil stabilizes and domestic demand remains subdued.
USD/CAD is trading closer to 1.403 after the weaker US CPI and PPI prints pulled the Dollar lower. As expected, yesterday’s BoC meeting did not move the needle much for FX markets. That leaves yield differentials as the main driver of price action, with lower US yields helping the pair break further below 1.41. Higher oil prices remain a secondary support for the loonie, but the direction of US rates and the Dollar should matter more for USD/CAD from here.
Euro’s rates support meets energy resistance
The euro remains relatively well supported against the dollar, with EUR/USD holding above 1.14 as softer US inflation data continues to weigh on the greenback. Yesterday’s benign PPI release reinforced the message from this week’s CPI report that US price pressures may be moderating, prompting markets to further trim Fed tightening expectations. As a result, short-term rate differentials have moved in a manner that’s modestly supportive of the euro and other major currencies against the dollar.
However, unlike many of its peers, the euro faces a significant headwind from energy markets. Were it not for the renewed tensions in the Gulf and the associated surge in oil and gas prices, the recent shift in US rate expectations would likely provide a clearer path higher for EUR/USD. Instead, rising energy costs are once again complicating the outlook for the eurozone economy and limiting the euro’s ability to fully capitalise on broader dollar weakness.
From a technical perspective, EUR/USD appears to be encountering resistance in the 1.1460–1.1470 area, while demand remains evident below 1.14. That suggests the pair is likely to remain range-bound for now.
The broader story remains unchanged: falling US inflation is keeping the dollar on the defensive, but rising energy prices are preventing the euro from fully taking advantage.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
