Dollar Nears a Two-Month Low — Can US Inflation Change the Story?

The US dollar is starting the week near a two-month low, but traders are already looking ahead to the next major test: US inflation data.

Last week's weak jobs report changed the market's view of the Federal Reserve. July payrolls unexpectedly fell by 23,000, making another rate hike look less urgent and pushing the dollar lower.

Now the focus shifts to CPI.

Markets expect core inflation to rise around 0.2% month-on-month in July, putting the annual rate near 2.5%. A softer reading would give the Fed more room to stay patient, while a hotter number could quickly bring rate-hike expectations back into the conversation.

That makes the dollar's next move less straightforward than it looks.

A weaker CPI could put further pressure on the dollar and Treasury yields, potentially supporting gold and other rate-sensitive assets. A stronger-than-expected number could do the opposite.

Oil adds another complication.

Brent has moved back toward $85 a barrel as uncertainty around the Strait of Hormuz continues. Higher energy prices can feed into inflation expectations, making the Fed's job more difficult even if the labour market is weakening.

For traders, the key isn't simply whether CPI beats or misses expectations. What matters is whether the data changes the market's view of the Fed's next move.

A soft inflation print could reinforce the recent dollar downtrend. A hotter reading could give dollar bulls an opportunity to fight back.

The jobs market has already changed the rate story. Now inflation has to decide where it goes next.