US Dollar: CPI surprise could lift DXY toward 105 - MUFG

MUFG’s Derek Halpenny highlights that G10 FX volatility has eased after the recent spike driven by higher US yields, but warns risks remain skewed to renewed turbulence. He links Middle East tensions, potential US involvement, and energy prices to further upside in yields and Dollar strength. September US CPI is seen as pivotal for rates, with a strong print supporting another leg higher for the Dollar and DXY.

Yields and CPI drive Dollar

"G10 FX volatility is starting to turn lower again after the recent spike higher as the US dollar strengthened in response to the surge in sovereign bond yields. There has been a similar modest retracement in bond market volatility as well and if bond yields have settled around a new equilibrium then we could see volatility come down further in both rates and FX. However, the risks appear greater to us that we could still have further to go in this current spike in yields."

"Inflation data from the US today is very important and that will shape the very near-term direction of rates and a softer print would help ease the broader risks but the current conditions and geopolitical backdrop still point to increased risks of more volatile financial market conditions that would, at least initially, be supportive of another leg stronger for the dollar."

"Near-term though the Fed look set to hike again and any upside surprise in today’s data would likely trigger another rates sell-off and extend the dollar further stronger. Based on our 2-year UST bond yield projections, the DXY could certainly advance to the 105-level that would imply EUR/USD potentially falling below the 1.1000-level."

"A consensus CPI print today is unlikely to alter rate expectations much and a meaningful miss to the downside (0.0% m/m core) would be required to see a notable dollar sell-off."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)