Underlying consumer price growth turned negative in the United States last month, smashing the case for an imminent rate hike from the Federal Reserve, and adding to the downward pressure building against the dollar. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index—with highly-volatile food and energy prices excluded—fell -0.02% in month-over-month terms in June, slowing sharply from the 0.2% pace set a month earlier. This undershot all of the estimates provided by economists ahead of the release, and lowered the annual increase in prices to 2.6% from 2.9% previously.

Softness was broad-based, spread across most key categories, with slower shelter price increases playing a major role, while medical care and education costs declined in outright terms. Areas that might have experienced second-round energy price effects—like airfares and food—saw surprisingly modest gains.

Assisted by a sharp decline in gasoline costs, the more-volatile all-items headline price measure fell -0.4% in June from the prior month, bringing its year-over-year gains down to 3.5% from 4.2% previously.

Treasury yields are coming down on the policy-sensitive front end of the curve, equity futures are surging, and the dollar is retreating against its major rivals, extending an overnight decline against its commodity- and rate-sensitive counterparts alike as traders pull back on expectations for a July rate hike. The Canadian dollar, Mexican peso, euro, and pound sterling are all punching higher.

Monetary tightening expectations had climbed sharply in recent days on a substantial jump in crude prices and an unusually-hawkish speech from Fed governor Christopher Waller, who warned “if we get another hot reading on core inflation this week, then the FOMC (Federal Open Market Committee) will need to consider tightening monetary policy in the near term”. “Sternly staring at inflation until it melts before our withering gaze is not an option,” he added—although that is exactly what appears to be playing out.

Taken in sum, it looks as if tariff- and energy-price passthrough effects are ebbing, putting the US economy on a modestly disinflationary trajectory. The hawkish turn in Fed expectations that supported the dollar in the last two months looks to be on its last legs, meaning that its major-currency rivals should be well-positioned for further gains.