- Investors on Wednesday were betting the Fed will dial back on rate hikes next month after July's CPI reading.
- The CME FedWatch tool showed a 41.5% probability of a September rate increase of 75 basis points, coming down from 68% on Tuesday.
- The US Dollar Index was lower after July inflation cooled to 8.5%.
Investors on Wednesday were pricing in expectations the Federal Reserve will take on a relatively more dovish approach to rate hikes in September after data showed inflation cooled in July.
The CME FedWatch tool showed a 58.5% probability of a rate increase of 50 basis points next month, higher than the 32% probability a day earlier.
Meanwhile, the probability of a rate increase of 75 basis points was at 41.5%, coming down from 68% on Tuesday.
The pricing indicates investors are betting that US central bank won't deliver a third-consecutive hike of 75 basis points in the wake of July's inflation print. Headline inflation rose to 8.5% in the year through July, slower than June's 9.1% rate and lower than the 8.7% Bloomberg consensus estimate.
US stocks soared after the inflation report, driving the S&P 500 toward breaking a four-day run of losses. The Fed has embraced an aggressive pace of rate hikes – four so far in 2022 – as it battles to bring down consumer prices from a four-decade high. It raised rates by 75 basis points in July and June, with the former the largest increase since 1994.
Prospects of a smaller rate hike in September sent the US Dollar Index tumbling, down 1.4% to 104.88, largely as the euro stepped up 1.2% to buy $1.0331.
The market's confidence has fallen "to only about 50-50" for another big hike next month, Marc Chandler, managing director at Bannockburn Global Forex, told Insider in an interview. "But even that 50-50 is still relatively strong," he said.
"This is a tug-of-war right now with the Fed," Chandler said. "The market says, 'You can tighten financial conditions in the short term. But we're concerned that come end of this year, early next year, the economy will be in such a condition and price pressures would have eased that we think you, the Fed, will be on hold until late 2023 when you'll end up cutting interest rates.'"
Core CPI, which excludes food and energy prices, was unchanged at 5.9% year-over-year as a drop in gas prices offset increases in the food and shelter indexes. Investors were widely bracing for a 6.1% reading.
The Federal Open Market Committee will meet on September 20-21.
