US FX WRAP: Dollar hit by soft US CPI; NZD rally continues

USD was broadly weaker in response to softer-than-expected inflation data for June. CPI came in beneath expectations on all gauges. Headline M/M declined 0.4%, steeper than the expected -0.1% as the plunge in oil prices weighed. Meanwhile, core was flat in June despite expectations for a 0.3% rise; Y/Y gauges were also soft. DXY saw sharp immediate downside on the report as it pushed back against perhaps the elevated hawkish mood that arose from Fed's Waller remarks on Monday, "if there is another hot reading on core inflation this week, the Fed will need to consider a rate hike in the near term". Since the immediate USD move lower, DXY weakness has trimmed, with DXY back to 100.91 from lows of 100.607. The move is likely influenced by the worsening tensions in the Middle East putting in a floor for the dollar. Strikes have continued throughout the day between the US and Iran with no sign of an immediate path towards de-escalation. A U-turn from Trump on the recently touted 20% Hormuz navigation fee had a short-lived downside impact on prices, as Trump said compensation for US protection in the Strait will come via trade and investment deals with various Gulf states.

Following the US CPI report, Fed Chair Warsh and 2027 voter Goolsbee sounded against being overreactive towards today's CPI report. Warsh notes that the data does not say mission accomplished, while Goolsbee said if we got several months like this, it would feel better.

Kiwi was the best performer once again as markets added to RBNZ tightening bets. Money markets see 58bps of tightening by year-end, +5bps since Monday. Following hawkish remarks from RBNZ's Conway and a strong quarterly NZIER Business Confidence, NZD/USD finished +1.1% higher at 0.5810.