US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped to the lowest levels in two weeks after the US Bureau of Labor Statistics released downbeat figures of the US Consumer Price Index (CPI) for July on Wednesday.

That said, the inflation precursor dropped to 2.43% by the end of Wednesday’s North American session.

Following the US inflation release, US President Joe Biden said on Wednesday that they are seeing some signs that inflation may be moderating, as reported by Reuters. "We could face additional headwinds in the months ahead," Biden added. "We still have work to do but we're on track," adds US President Biden.

“After Wednesday's CPI report, traders of futures tied to the Fed's benchmark interest rate pared bets on a third straight 75-basis-point hike at its Sept. 20-21 policy meeting, and now see a half-point increase as the more likely option,” said Reuters.

However, Minneapolis Fed President Neel Kashkari mentioned, “The Fed is ‘far, far away from declaring victory’ on inflation. The policymaker also added that he hasn't ‘seen anything that changes’ the need to raise the Fed's policy rate to 3.9% by year-end and to 4.4% by the end of 2023. Elsewhere, Chicago Fed President Charles Evans mentioned, “The economy is almost surely a little more fragile, but would take something adverse to trigger a recession.” Fed’s Evans also called inflation "unacceptably" high.

FX implications

Markets remain cautiously optimistic following the latest reduction in the US CPI, as well as the slump in inflation expectations. That said, S&P 500 Futures print mild gains near 4,120 by the press time.