The US June CPI Strips Dollar of any Support as Odds of a Hawkish Fed Outcome Plummet

The US June CPI report left the dollar entirely defenseless, causing the US currency index to plummet to nearly 100 level:As seen in the chart, this is the lowest level since April 2022, meaning the dollar index has not been in this area for over a year. Dropping below the 101 level, the dollar index broke through a support area that was formed by a double bottom in February and May 2023, so we are likely to see further downward movement as an important support level has been breached. To assess the potential decline of the dollar, it's worth looking at the EURUSD chart, which provides more informative insights. There are two areas where dollar buyers may make their presence felt – 1.12500 and 1.15. The first level coincides with the upper boundary of the current ascending channel, while the second level aligns with a long-term resistance trendline that the price tested in 2011, 2012, 2014, and 2021:It should be noted that the US currency had been already in a downbeat mood before the CPI was released. The DXY had been on a slippery slope for the fifth consecutive day yesterday, largely influenced by the unexpectedly dovish rhetoric of two top Federal Reserve (Fed) officials, Daly and Bostic. They notably deviated from the central line of communication between the regulator and the markets by stating on Tuesday that monetary policy is already restrictive enough and that the Fed may need to take time to observe how the economy responds to the policy tightening. Of course, such comments contradict Powell's statements at the ECB Sintra symposium, where he said that no officials anticipate a rate cut this year and that the vast majority of FOMC members believe that the interest rate should be even higher.Yesterday's inflation report clearly shifted the balance of power in favor of the doves within the FOMC. Overall inflation declined to 3% (forecast was 3.1%), while core inflation, which excludes goods and services with volatile prices, slowed from 5.3% to 4.8% (forecast was 5%). The significant progress in core inflation, which FOMC officials referred to as the key variable determining short-term Fed policy, allowed the markets to reassess the likelihood of two rate hikes this year to the downside. If a week ago the probability of the Fed raising rates twice by the end of the year was 36%, it has now decreased to 13%. Consequently, the outcome with one rate hike has become the baseline, with the probability rising to 64%:Today, the US producer inflation index for June is also due, and the markets are likely to pay some attention to it, considering that it is a leading indicator for consumer inflation. The indicator is expected to be at 0.2% MoM. The market may also pay attention to the data on the initial and continuing jobless claims, the importance of which has significantly increased since the June NFP indicated the first signs of weakness in the labor market. The key report for tomorrow is the University of Michigan Consumer Sentiment Index for July, which is expected to be slightly higher than the previous month at 65.5 points.