Following the release of the CPI figures on Tuesday, the trade-weighted US dollar lost around half a percent. This weakness continued over the past two days, until yesterday's producer price inflation figures were released. These were significantly higher than expected, at 0.9% compared to the previous month. In fact, none of the approximately 50 analysts surveyed by Bloomberg had predicted an increase of more than 0.4%. This significantly higher-than-expected rise in producer prices probably reminded markets that the newly introduced tariffs could impact inflation in the US after all, Commerzbank's FX analyst Volkmar Baur notes.

USD is likely to face pressure in the coming months

"However, it is surprising that it took today's PPI figures to bring this about. After all, core inflation also exceeded expectations slightly on Tuesday and revealed some worrying signs in the details. Looking at the momentum of core inflation (seasonally adjusted 3-month change annualised), for example, we see an acceleration from 1.7% in May to 2.8% now. Therefore, in recent months there has been no sign of a sustained downward trend towards the Fed's 2% target."

"Moreover, the fact that prices in the core goods sub-component rose by only 0.2%, indicating few signs of price increases due to tariffs, is deceptive. Apart from the period following the last inflation shock, this was the highest increase in July since 2001. Since 2001, the annual rate of change in core goods prices has been below zero in more than 50% of months. Goods prices normally tend to fall. In most cases, it is services that fuel inflation. Therefore, it should also be a warning sign that the annual change in core goods was 1.2% in July. This is the highest figure since 2011, excluding the period of high inflation following the pandemic."

"Does this mean that the Fed should exercise caution before committing to an interest rate cut in September? Probably. Will it leave its key interest rate unchanged in September as a result? Probably not. It is precisely this discrepancy that is likely to put increasing pressure on the US dollar in the coming months."