Traders slash July Fed rate hike odds as September bets jump to 76%

Traders pared bets on a July Federal Reserve rate hike, with CME FedWatch data showing the implied probability falling as focus shifted to September. The repricing comes ahead of June CPI data and Fed Chair Kevin Warsh's first testimony before Congress this week.

"The market is recalibrating after a week of mixed signals — strong China trade data on one hand, escalating US-Iran tensions on the other," said Kaynat Chainwala, AVP Commodity Research at Kotak Securities. Fed Governor Christopher Waller said Monday the central bank may need to raise rates "in the near term" if inflation continues running well above the 2 percent target.

CME FedWatch data showed the probability of a September rate increase climbed to about 76 percent, up from 57 percent a week earlier, while bets on a July move declined. The shift rippled across currency markets, with the dollar weakening against major peers. The euro rose 0.1 percent to $1.1392, while gold recovered 0.5 percent to $4,021.62 an ounce after touching a two-week low. Brent crude climbed 1.8 percent to $84.80 a barrel after the US reinstated a naval blockade on Iran.

The repricing reflects a complex backdrop where rising energy costs from US-Iran tensions feed inflation expectations even as they cloud the growth outlook. Tuesday's CPI print and Warsh's testimony will be the next key inputs, with markets watching for any signal on the pace of tightening through year-end. If inflation prints hot, the September hike probability could push higher; a cooler reading would reinforce the case for patience.

Rate Path in Flux

The shift in rate expectations marks a reversal from last week, when hawkish Fed minutes revealed policymakers remained split on the case for another hike despite a steady labor market. The probability of a September increase has now risen to levels not seen since early June, reflecting a market that sees the Fed's next move as delayed rather than abandoned.

The last time traders similarly repriced rate expectations was in May, when softer payrolls data briefly pushed September odds below 40 percent before a string of stronger inflation readings reversed the move. This week's CPI data will test whether the current repricing holds.

Cross-Asset Ripple Effects

The dollar's retreat from recent highs provided some relief for risk-sensitive currencies, while gold's bounce from a two-week low suggested haven demand remained intact despite the broader pressure from higher oil prices. The yen stayed near a 40-year low against the dollar, keeping traders on alert for possible intervention by Japanese authorities.

China's stronger-than-expected June trade data — exports surged 27 percent year over year, beating the 18.2 percent consensus estimate — offered a counterpoint to the geopolitical jitters, supporting commodity-linked currencies and helping stabilize Asian equity markets.

What Comes Next

All eyes are now on Tuesday's CPI release, followed by Warsh's testimony before the House Financial Services Committee on Wednesday. The Fed's next policy decision is scheduled for July 28-29, with markets now pricing a greater chance of action at the subsequent September meeting.

This article is for informational purposes only and does not constitute investment advice.