Inflation lands without a punch

USD: CPI keeps September Fed meeting live

July CPI landed almost exactly where markets expected. Headline CPI rose 0.1% m/m after falling 0.4% in June, while core CPI rose 0.2% after being flat the prior month. On a yearly basis, headline inflation eased to 3.4% from 3.5%, and core inflation slowed to 2.5% from 2.6%. That gives the Fed another mild inflation print, but not enough to end the debate.

The market reaction has been muted, as expected for an in-line print. The 10-year Treasury yield remains lower on the day near 4.66%, the DXY is slightly softer, and September hike pricing is around 45%. Equities can return to earnings, while fixed income gets some room for a relief rally. The next test is whether PPI confirms that pipeline inflation is also cooling.

The details were broadly manageable. Shelter rose only 0.1% and accounted for about two-thirds of the monthly headline increase, while energy fell 1.5% and gasoline dropped 2.9%. Food rose 0.1%, with food away from home up 0.3%. Core services rose 0.2%, which keeps the direction encouraging, even if the Fed will want more proof.

This report does not add pressure for a September hike. A second soft inflation reading helps the hold camp, especially after last week’s weaker jobs report. The issue is that one more inflation report comes before the September meeting, and Chair Warsh will likely need similar numbers in August to sound comfortable. For now, the data supports patience and short-term fixed income gets room more relief, dragging the US dollar down.

CAD: CAD gets help from CPI

USD/CAD is trading closer to 1.3915 after the US CPI print landed broadly in line with expectations. Headline CPI rose 0.1% m/m and core CPI rose 0.2%, while core inflation slowed to 2.5% y/y. That is still above target, but the monthly pace is more consistent with the Fed’s goal and gives policymakers room to wait. For FX, the print keeps pressure on the dollar and extends the post-payrolls move lower in USD/CAD.

The rate-spread story is doing most of the work. The US two-year yield is now near 4.18%, while Canada’s two-year is around 2.99%, leaving the spread close to 119bp. That is a sharp compression from the late-July high near 145bp and has removed an important layer of USD/CAD support. The move reflects softer US rate pricing after weak payrolls and an in-line CPI, while Canadian yields remain supported by last week’s strong jobs report.

For the Bank of Canada, the setup remains comfortable. Canada delivered stronger hiring, a lower unemployment rate and cooler wage growth, while the US is now showing softer payrolls and milder inflation. That relative mix argues for BoC patience and keeps CAD supported unless US inflation or tariff headlines push back.

A sustained break below 1.3910 would likely need another catalyst, with the August 19 tariff deadline now the key domestic risk. Canada and the US are trying to reach a deal before a new 50% tariff on roughly US$20 billion of Canadian exports takes effect, while Canada is reportedly considering concessions on US alcohol sales, auto tariffs and dairy import quotas in exchange for broader tariff relief. If talks progress, USD/CAD could extend toward 1.3850; if the tariff threat lands, the pair could quickly find support back above 1.40.

MXN: Peso carry holds its ground

USD/MXN is trading near 17.00 handle, leaving the peso close to its strongest level in three months and well below the June peak around 17.61. Mexico’s two-year yield near 7.25% still offers roughly 300bp of carry over the US two-year, even after narrowing from May. Banxico helped preserve that support by holding rates at 6.50% for a second straight meeting and giving little sign that easing will resume soon. Headline inflation is near target, but core and services inflation remain sticky enough to keep the central bank cautious.

Mexico’s domestic backdrop also supports the peso. Q2 GDP rebounded 1.5% q/q after the first-quarter contraction, while international reserves have risen to about USD255.5bn. Exports remain an important cushion, especially as Mexico benefits from its role in the US AI infrastructure buildout through data-center and tech-linked shipments. That gives MXN a broader foundation than carry alone.

The setup is constructive, but positioning is no longer light. Leveraged funds are already holding their largest MXN net longs since April, which raises the risk of a sharper unwind if sentiment turns. Hormuz headlines, Banxico guidance and North American trade risks are the main variables from here, but if US inflation stays contained MXN should keep the stronger carry and policy mix.

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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.