Dollar Weakens After July CPI Cools; Oil Shock Looms

July payrolls unexpectedly contracted, and May and June employment figures were revised lower. That weakened the case for another Fed hike. With rates at 3.50-3.75%, policy is already restrictive. If labor conditions continue weakening, more tightening becomes harder to justify. Core inflation remains above target. Brent near $90 creates upside risk. The Fed has been pushed back to the middle.

Two reports carry more weight than July CPI alone. The August employment report on September 4 will show whether July's payroll contraction was a one-off. August CPI on September 11 will show how much the renewed oil surge is feeding into prices. The Fed's September 15-16 meeting will follow.

The International Energy Agency said inventory buffers are being rapidly depleted, increasing the urgency of reopening the Strait of Hormuz.

The dollar's reaction to July CPI was measured. It trimmed Fed hike risk without embracing a new easing cycle. The next decisions will depend on whether the second oil shock follows the first or takes a different path.