US FX WRAP: Dollar sees two-way action, but initially firms on hotter-than-expected core M/M print

The Dollar Index ended the day more-or-less flat, although that only tells half the story, with the Greenback initially surging following the US CPI report after core CPI M/M came in hotter than expected. The data prompted a broad-based hawkish reaction across assets and saw markets increase expectations for a 25bp hike at next week's FOMC meeting. Highlighting this, markets now assign around a 90% probability of a 25bp hike next Wednesday, up from around 70% pre-data, while several sell-side banks revised their Fed calls, with JPMorgan now expecting hikes in both September and December. However, despite the initial Dollar rally, the move subsequently pared in full, and then some, with no clear catalyst behind the reversal, although the move coincided with US Treasury yields paring some of their earlier gains. Looking ahead, attention turns firmly to the FOMC and whether policymakers pull the trigger on a hike, which is now largely priced in. G10 FX performance ended the day mixed against the Greenback, despite all currencies initially weakening in the immediate aftermath of US CPI. The Yen, Antipodeans and Pound ultimately firmed, while the EUR, CAD and Swissy saw losses, albeit to varying degrees. Away from the US inflation data, UK GDP for July impressed, rising 0.4% M/M (exp. 0.0%, prev. 0.3%). While the data points to economic resilience, with the GDP beat accompanied by a sharp recovery in manufacturing, it is unlikely to materially alter expectations for next Thursday's BoE policy decision. It does, however, provide the MPC's hawks with further ammunition to argue for tighter policy. For the Swissy, SNB Chairman Schlegel said the CHF exchange rate remains a challenge for the Swiss economy, although the real franc has been broadly stable since 2020. For the Euro, There were also some ECB remarks, although they did little to move the dial. Chief Economist Lane noted that if the rise in energy prices persists, it could weigh on consumption in the autumn, although he stressed that the outlook remains uncertain.