The US Dollar experienced notable weakness following the release of softer-than-expected Consumer Price Index (CPI) data for June, which showed annual inflation declining to 3.5% from 4.2% in May, and a monthly decrease of 0.4% with core CPI unchanged. These figures came in below analysts' estimates and triggered a USD selloff, with the USD Index falling more than 0.3% and remaining below 101.00 in the early European session [3]. MUFG’s Derek Halpenny highlighted that the weaker CPI sharply reduced market expectations for a Federal Reserve rate hike, dropping the probability of a July hike from nearly 50% to closer to 15% [4]. This undermined a key pillar of recent US Dollar strength and opened the possibility for further dollar depreciation, although Middle East tensions and a 13% surge in crude oil prices this week complicate the trading outlook [4].
Federal Reserve Chair Kevin Warsh maintained a firm anti-inflation stance during his congressional testimony, emphasizing the Fed's commitment to achieving its 2% inflation mandate and stating, “if we get policy right – and we will – the inflation surge of the last five years will be a thing of the past” [3][4]. ABN AMRO’s Rogier Quaedvlieg, referencing the June FOMC minutes, outlined two main policy scenarios: one where inflation improves soon, leading to steady rates before eventual cuts, and another where sticky inflation and a stable labor market could require 'some firming,' interpreted as potential 25 bps hikes in September and December [2]. However, the prevailing market sentiment is that the Fed is likely to stay on hold for the rest of 2026 [2].
The currency heat map for the week showed the US Dollar as the weakest against the New Zealand Dollar (-0.90%) and Canadian Dollar (-0.71%), reflecting broad USD softness across major pairs [3]. EUR/USD found support around the 1.1400 level, with the CPI data reinforcing this floor [4].
Attention has shifted to the Bank of Canada (BoC) rate decision, with ING’s Francesco Pesole expecting the BoC to keep rates unchanged at 2.25%, in line with consensus and pricing. He noted that Canada’s June CPI may fall below 3.0% due to declining petrol prices, while core inflation remains close to 2.0%. The BoC is seen as having limited incentive to push back against modest December tightening pricing, and CAD front-end rates are expected to be driven by Gulf developments and supported oil prices. A sustained break below 1.40 in USD/CAD would require further dovish Fed signals [1].
CONCLUSION
Softer US inflation data has significantly reduced expectations for near-term Fed rate hikes, weakening the US Dollar and shifting market focus to the Bank of Canada’s policy decision. While Fed officials remain committed to their inflation mandate, the probability of further tightening has diminished, and the USD is broadly weaker against major currencies. Oil price dynamics and geopolitical tensions continue to influence both USD and CAD outlooks.