CPI Cools, Dollar Outlook & What the Fed Does Next

The release US CPI inflation numbers coming in cooler than expected at the same time, newly appointed Fetcher Kevin Warsh is preparing to face Congress for a high stakes testimony and confusion over a closed Strait of Horms and policy shifts rippling through the affects markets at a time when we're seeing rising oil prices with WTI and Brent higher while joining me to weigh in this morning is the line that VP and global head of market strategy for Brown Brothers.

Elias, thank you so much for joining us.

There are a lot of moving parts this morning.

So let's start out with the consumer prices.

So do these new numbers give the US currency the green light to rally, or is this hawkishness already baked into the price?

Well, good morning, Remy, and thank you for having me on.

Uh, Clearly, I mean, the CPI print was on the soft side.

Uh, US inflation cooled more than expected.

In fact, you know, both on a month over month basis, uh, headline CPI and the so-called super core CPI, so excluding or services excluding housing, uh, uh, both declined month over month in June.

Core CPI was flat.

Uh, I think the market reaction was exactly as you would expect.

Uh, Fed fund's future slashed rate hike expectations, especially for July.

It went down from odds of 43% chance of a hike before the CPI print to now less than 15 or 16% dollar reaction.

Uh, also, uh, essentially in line with what you'd expect, the dollar fell across the board, uh, because of this downward repricing to uh Fed funds rate expectations.

Uh, now, you know, going forward, um, I'm not too, uh, I don't think this, the CPI print by itself is. is negative for the US dollar.

In fact, I think it reinforces perhaps the fact that the US dollar should continue to be resilient with the risks skewed to the upside over the next couple of months, because think about it, you've got a US macro backdrop that's essentially in a Goldilocks situation, right?

You've got slowing underlying inflation, uh, resilient labor market condition, or at least stabilizing labor market conditions.

And, um, and an economy that's growing at a relatively uh encouraging pace.

Um, so the US macro backdrop, uh, is, is, uh, is quite resilient, especially relative to peers and uh other major economies, and I think this should keep the US dollar uh well.

Supported, uh, in the, in the near term.

This relative macro backdrop story is still, uh, I, I think positive here for the, for the US dollar.

So, uh, too soon to expect a, uh, downward reverse reversal, uh, in the US dollar despite, uh, the softer uh US inflation print in June.

Yes, and as you mentioned, it's all about the energy price shock for the latest month.

But here in New York morning trade, we are looking at WTI above $80 a barrel, and we are looking at Brent higher by about 4% as well.

So this will factor into CPI as we head into the rest of this month as well as the summer.

But when it comes to fetcher Kevin Warsh, he is On Capitol Hill for two days of testimony where Congress will grill him on monetary policy as well as perhaps ask him about the task forces.

So what are your expectations for the new Fed chair, and I know you mentioned other central banks as well.

So how does this factor into rate differentials, especially given some of his recent appointments for his task force.

Yeah, I mean, it's a, it's a, it's a difficult, uh, it's difficult to really unpack all of this, but I think one thing is certainly, you're not going to have much forward guidance uh from uh Kevin Warsh today.

Uh, what I do expect is Kevin Warsh to reiterate his firm commitment to keep uh uh inflation, uh, to make sure that inflation.

Uh, returns to the 2% target.

I think that will suggest that a Fed policy or a higher Fed policy rate for longer, uh, is the, is the key market narrative, and that will continue to be supportive here for the US dollar.

And I think that that will be the extent, if you will, of his forward guidance, uh, in, in, in the near term.

Uh, I think will be a bit more interesting perhaps will be.

He sheds a little bit more color with respect to this, uh, to his 5 task force, uh, given that he's already nominated the uh the leading individuals that will lead these 5 task force.

I believe with on productivity, uh, uh, communication, uh, data, uh, reliability, uh, the Fed's balance sheet, that's an important one.

Uh, so it will be, uh, uh, I, I think he, he, you know, he, he, what he says around this, this task force, uh, could, uh, perhaps give us a bit more color, uh, about the future conduct of monetary policy, and I think that Kevin Warsh's view on productivity, uh, inflation, right, he favors trim mean inflation.

Uh, and the Fed's balance sheet suggests that the risk from this task force is that it skews, uh, the policy stance going forward towards a more dovish stance, but, uh, I think that's the common market narrative.

I would lean against that.

Uh, but yeah, stay tuned for, for his, uh, his comment that could add maybe another layer of volatility today outside of the bank earnings and the CPI numbers we had.

Yes, and Elias, we continue to monitor the situation in the Middle East.

Of course we're seeing conflicting reports and when we're talking about the global economies as well as the global central banks, we know that rising energy prices do affect each nation's economy differently, and we are coming off the NATO summit as well as the gathering.

That took place with European Central Bank leaders and Kevin Wars in central Portugal.

So when we're looking at the second half of 2026 for the major currency pairs, what are some of your ranges and give us an understanding of what you expect from the major central banks.

Well, I, I, I think it's uh in, in terms of the majors, I, I still think that the Fed uh is uh probably on track to raise interest rates later this year.

Uh, the underlying inflation backdrop is still sticky, uh, above the Fed's 2% target, and I think the US macro backdrop of resilient labor market conditions and consumer spending activity, uh, justifies, uh, perhaps one hike, but further than that, more than that will be difficult considering that monetary policy in the US is around, you know, neutral to even restrictive.

Uh, so I see, uh, there's a limited scope for an upward revision here to US rate expectations.

The ECB Bank of England, markets pricing in roughly 50 basis points of hikes in the next 12 months.

Um, I think that's reasonable in the current inflation context of this inflation shock, but it's not going to be very positive for their currency because remember, those central banks, they're raising rates because of the inflation shock, not because the, the economy or their economies are res.

Resilient.

So, you know, to me, the combination of raising interest rates for an inflation shock at a time when the growth outlook in your domestic economy for the UK and the Eurozone, for instance, is sluggish, that's not positive for a currency.

It's supportive.

It will limit downside, but it's not going to be a tailwind for their currency.

Uh, so, uh, uh, so, so I'm not too positive on the.

Pound or on the euro.

Meanwhile, RBNZ has probably a bit more room to tighten policy given that its policy rate is still, you know, below or near the lower end of its uh uh neutral range estimate.

RBA RBA is probably close to the end of its tightening cycle, so perhaps more upside here for the New Zealand dollar versus the Australian dollar.

And very quickly, I do want to get your take on the BOJ.

We have about 60 seconds here, so give us your take for the central bank as well as the Japanese yen.

Yeah, well, for, for the Bank of Japan, uh, 50 basis points is priced in in terms of hike over the next 12 months.

I think here again, that's reasonable.

Uh, a more hawkish repricing in BOJ uh rate expectations, I think is unlikely in the context that underlying inflation in Japan is still well below 2%.

The BOJ's measures of underlying inflation.

So that, that suggests there's limits. room for significant upward shift in BOJ rate expectations, and that to me limits uh uh upside potential for the yen.

I'm still bullish on the yen because of the positive, you know, relative monetary policy and fiscal backdrop that's supportive of the yen, but the fact that the, the, the BOJ will struggle to lift rates more than what is anticipated, I think, uh, will cap dollar yen downside to probably 155.

Well Elias, we will have to leave it there for today as we are creeping up against the market open here in New York.

Thank you so much for joining us today and thank you as always for your perspective and your insights.

Thank you, Rey.