Equity markets made another leap upwards amid a buildup of expectations of a slight dovish shift in the Fed policy. This was facilitated by the release of the US July CPI, which showed that inflation in July decelerated faster than expected. Core inflation remained unchanged at 5.9% (despite expectations of acceleration), headline inflation slowed down by 60 bp to 8.5%. The main contribution to the easing in headline inflation was expectedly made by fuel and gasoline prices:

The decline in gasoline prices eased inflation pressure in transportation services as well, where prices declined by 0.5% MoM. Some cooling of consumer demand occurred in the market of used cars, where a monthly deflation of 0.4% was observed. Clothing prices inched lower by 0.1%.

The dollar lost about 1% yesterday against a basket of major currencies as the CPI report dented prospects of a 75 bp rate hike in September. The odds, according to rate futures, have fallen below 40%, the base case is now a 50 bp rate hike. In the Treasury market, the shift in expectations did not last long, largely thanks to the comments from Fed officials (Evans and Kashkari), who, after the release of the CPI, continued to develop the recent line of rhetoric of the Fed - the chances of a US recession are low, the fight against inflation is not over and policy easing is not expected next year. Yield to maturity on two-year US bonds fell by 20 bp after the release but recovered 15 bp towards the end of the day. Today the short-term bond trades at around 9 bp below the yield, which was before the release of CPI (3.28%).

A real shift in market expectations and the Fed policy should probably be expected after two key indicators of the inflation trend - shelter prices and wages - show signs of slowing down. The first one is important because it is the most "sticky" among all inflation components, the second - because it is a leading indicator of consumer demand cooling. As long as the imbalance in the US labor market persists, and it generates wage inflation, the Fed is unlikely to change its rhetoric, given how the central bank damaged its reputation with a belated start of tightening and a huge underestimation of inflation persistence in the first half of 2022.

The next major event for those who follow the Fed's policy will be the Jackson Hole Symposium in August 25-27, which is famous for central bank officials sharing their strategic views on how monetary policy should be conducted.

On the technical side of the EURUSD chart, as expected, market made a breakout from the bearish channel following the formation of the wedge pattern, and today a test of the key resistance line took place, which until the beginning of July acted as support (1.04). The prospect of a EURUSD movement further up will be determined by a potential breakout of the line and the possibility of fixation above it: