Fed hike bets ease after US CPI but Hormuz stalemate limits reaction

September rate hike bets fade further

US inflation moderated for a second straight month in July, even as oil prices surged when tensions between the US and Iran flared up again. The fresh spike in gasoline prices might make more of an impact in the August data, but for now, the July numbers are seen as keeping the Fed on hold, at least through September.

With both headline and core CPI cooling in July, the Fed can afford to take more time deciding whether tighter policy is warranted. The odds for a 25-bps hike in September have now dropped to around 35% from more than 50% before the data.

Nevertheless, the September meeting is still a live one, not only because Fed policymakers will be able to sift through the August CPI and NFP reports, as well as the July PCE figures before then, but also because even after the declines, inflation remains too high.

Hence, the market reaction has been somewhat muted. A downside surprise would likely have had a bigger impact in lifting sentiment, but with every reading matching the forecasts, there was not much for investors to get too excited about. Some traders may also be waiting for today’s producer prices for further evidence of easing price pressures.

Oil declines on reduced demand forecasts

Moreover, without a deal on reopening the Strait of Hormuz, inflation risks remain elevated. Rather than compromising to end the impasse, the US and Iran appear to be hardening their positions in the negotiations.

President Trump is claiming that the US “has total control over the Strait of Hormuz”, while Iranian sources are dismissing reports that there’s been progress in talks to extend the 60-day ceasefire period.

Oil prices jumped this week as optimism for a deal waned. However, oil futures are about 1.5% down today, as both OPEC and the International Energy Agency have lowered their demand forecasts for 2026.

Crucially, oil prices have peaked far below the July highs, suggesting the latest rebound has probably run its course.

Dollar shrugs off CPI data, yen steady

The ongoing stalemate over Hormuz and the growing prospect of a permanent disruption to oil supplies from the Middle East are likely supporting the safe-haven US dollar, which fell only briefly yesterday from the soft CPI report before reversing back up again.

The greenback is mostly flat on Thursday, edging marginally lower against the yen. According to Bloomberg, Japan’s prime minister, Sanae Takaichi, has shifted her stance on the Bank of Japan’s tightening plans, likely due to US pressure, and backs a near-term rate increase.

The odds for a September hike have soared in recent days and now stand at more than 60%. Japanese government bond yields have also been surging, but the boost to the yen has been negligible. The yen is only slightly firmer today, trading at 159.37 per dollar.

Pound and kiwi slip

The pound failed to get any lift from solid UK GDP data. The UK economy grew by 0.4% q/q in the second quarter. But the figure was in line with expectations and the trade deficit widened, possibly weighing on sterling.

The New Zealand dollar was the worst performer, however, as lower inflation expectations for the third quarter slightly dented bets for an RBNZ rate hike in September.

Higher yields don’t go unnoticed

Investors will be watching the US Treasury Department’s auction for 30-year notes later today, following yesterday’s weak demand for 10-year notes.

Despite the doubts about the Fed’s hawkishness and hopes for a resolution to the US-Iran conflict, the 10-year Treasury yield climbed to fresh highs at the end of July and has stayed elevated during August.

The US government deficit deteriorated to a monthly record in July amid the tariff refunds that have to be paid back after the Supreme Court struck down Trump’s levies. Rising deficits are also putting upward pressure on other government bond yields and this is likely keeping a lid on any risk rally.

Stocks stay mostly upbeat

European indices opened higher on Thursday with only London’s FTSE 100 trading in the red. Asian equities were also mixed, as a rebound in Korean chip stocks was unable to lift the entire region.

The S&P 500 closed just shy of its all-time high on Wednesday, while the Nasdaq 100 finished at a one-month peak. E-mini futures for all of Wall Street’s main indices are currently positive but may face pressure at the US open as Cisco Systems’ stock plummeted over 6% in after-hours trading.

The AI infrastructure provider failed to impress with its earnings yesterday even though it beat both its EPS and revenue forecasts. Investors were disappointed by Cisco’s projected revenue from AI, highlighting the ongoing concerns around AI valuations even as some AI-related stocks recover from their post-earnings selloffs.