Dollar Rebounds

The dollar index strengthened to 100.6 on Thursday, rebounding after losses in each of the previous two sessions, as investors assessed fresh economic data pointing to continued resilience in the US economy. Retail sales rose in line with expectations, with lower gasoline prices weighing on receipts at gas stations, while sales at motor vehicle dealers and nonstore retailers were robust. Meanwhile, initial jobless claims fell to a two-month low of 208K. Markets also continued to monitor developments in the Middle East, with oil prices hovering near one-month highs after the US intensified its strikes against Iran. Against this backdrop, markets are currently pricing in around a 12% probability of a rate hike by the Fed this month, while the odds of a hike in September stand at roughly 56%. The greenback was mostly higher against the British pound and the euro.

The dollar index traded around 100.5 on Thursday after posting sharp losses over the previous two sessions, as easing inflation pressures reduced expectations of a near-term Federal Reserve interest rate hike. Data released on Wednesday showed US producer prices unexpectedly fell in June for the first time in nearly a year, largely due to lower energy costs, following Tuesday’s softer-than-expected consumer inflation report. Markets trimmed expectations for a Fed rate increase in September, with the implied probability falling to around 44% from 50% a day earlier. Meanwhile, investors continued to monitor escalating attacks in the Middle East after the US launched additional strikes against Iranian targets. The renewed conflict pushed oil prices sharply higher this week, fueling fresh concerns over inflation and the interest rate outlook. Still, President Donald Trump said on Wednesday that Tehran had indicated a willingness to resume negotiations.

The dollar index edged lower to 100.7 on Wednesday after a softer-than-expected producer price report provided fresh evidence of easing inflationary pressures. Producer prices unexpectedly fell 0.3% in June, compared with expectations for no change, while both the annual headline and core measures also came in below forecasts. The report followed Tuesday's softer-than-expected CPI data, reinforcing signs of moderating inflation. Also, NY Fed President Williams said that while inflation “is unquestionably too high, there are encouraging reasons to expect that inflation has peaked”. However, escalating hostilities in the Middle East and the recent rise in oil prices continue to pose upside risks to the inflation outlook. Meanwhile, Fed Chair Warsh reiterated the central bank's commitment to restoring price stability during his congressional testimony. Markets are pricing in roughly a 49% probability of a Fed rate hike in September, below 70% last week.