U.S. July Inflation Meets Forecasts, Cutting the Likelihood of a Rate Hike

July’s consumer price index (CPI) came in on target, posting a 3.4% year‑over‑year rise and a 0.1% month‑over‑month increase, easing market expectations for a Federal Reserve rate hike.

July Inflation Numbers and Market Sentiment

■3.4% YoY CPI, flat from July 2025.

■0.1% MoM CPI change, unchanged from June.

■Core CPI (excluding food & energy) recorded 2.5%, below the Fed’s target.

■FactSet data shows the readings perfectly matched Wall Street consensus.

Pressure on the Fed’s Rate Decision

■The Fed’s policy range remains 3.5‑3.75%, with three governors voting for a quarter‑point hike.

■Ellen Zentner (Morgan Stanley) noted that an "in‑line" report keeps the "no need to hike rates" narrative intact.

■Charles Schwab analysts argue that meeting inflation expectations could pull the probability of a September hike from 42% down to under 30%.

■David Kelly (JPMorgan) expects a "steady, albeit sluggish, decline in inflation" over the coming months.

Key Indicators and Market Probabilities

■CME FedWatch tool shows a 73.8% chance of a rate hike at the December FOMC meeting; odds are lower in October (56.2%) and September (42.1%).

■The Bureau of Economic Analysis will release the PCE price index on Aug 30; May’s report showed a 3.9% rise, the fastest in nearly three years.

■Ongoing Middle‑East tensions keep energy prices elevated, sustaining inflationary pressure.

Market participants still gauge the Fed’s path through the lens of "inflation durability." July’s data reduces the likelihood of a hike, but energy price volatility and a robust labor market keep the decision ambiguous. Upcoming PCE figures and employment reports will clarify whether the Fed sticks to a "pause" or moves toward a "gradual tightening" approach. In this scenario, hitting the 2.5% core inflation target could lower risk premia and support a modest rebound in the EUR/USD pair.