Offshore yuan jumps 111 pips to 6.7740 after cooler US CPI data

The offshore yuan rallied to 6.7740 per dollar, its strongest level in a week, after a softer-than-expected US CPI report reduced the probability of a Fed rate hike at the July meeting to 15%.

"The weaker inflation data likely keeps the Fed on hold for now and reduces any rate hike odds," said Skyler Weinand, chief investment officer at Regan Capital. "But we remind investors that almost every communication that has emanated from Chair Warsh during his short tenure so far has been hawkish."

The consumer price index fell 0.4% in June from the prior month, the biggest decline since April 2020, and rose 3.5% from a year ago — below the 3.8% consensus estimate. Core CPI, which excludes food and energy, was unchanged month-over-month and up 2.6% annually, also undershooting forecasts. The offshore yuan traded in a 6.7880-6.7691 range during the session, with the rally triggered within minutes of the 20:30 ET release.

The reprieve may prove temporary. The US-Iran ceasefire collapsed this month, crude oil prices are climbing, and GasBuddy analyst Patrick De Haan warned the national average gasoline price could hit $4 a gallon again within a week. Fed Chair Kevin Warsh, delivering his first congressional testimony Tuesday, reiterated that restoring inflation to the 2% target remains his top priority — a stance that keeps rate hike risks alive if energy costs surge anew.

The energy index posted its largest monthly decline since April 2020, falling 5.7%, with gasoline prices dropping 9.7% in June. That more than offset increases in food and housing costs. Food prices rose 0.2% on the month and are up 3% from a year ago, while housing posted its smallest one-month increase since January 2021 at 0.1%.

The CME FedWatch tool showed an 85.6% probability that the federal funds rate will remain at its current 3.5% to 3.75% target range at the Fed's July 28-29 meeting, up from 58.3% a day earlier. The tool also showed a 0% chance of a rate cut by year-end, with a 42.2% probability of a quarter-point hike and a 29.7% chance of 50 basis points of tightening by December.

"The Fed was losing patience with high inflation, and today's cooler-than-expected report gives them room to breathe," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. "By surprising on the downside, it relieves immediate pressure for action."

Wall Street rallied on the data, with the S&P 500 rising 0.32% to 7,539.07 and the Nasdaq climbing 0.60% to 26,028.42. The dollar weakened broadly, providing additional support for emerging-market currencies including the yuan.

The sustainability of the yuan's gains hinges on the trajectory of energy prices. If the Iran situation escalates further and gasoline prices rebound, the CPI relief could reverse, forcing the Fed back toward a tightening bias and strengthening the dollar. The next key test comes with the July CPI release on Aug. 12.

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