US Dollar: CPI-driven moves point to near-term stability – MUFG

Lee Hardman at MUFG reports that the US Dollar’s initial post-CPI weakness quickly reversed, with the dollar index returning to around 100.00 as markets trimmed but did not abandon expectations for a September Fed hike. July CPI matched consensus, with energy driving headline gains while core inflation remains contained. MUFG expects the Fed to leave rates on hold in September, with USD stability likely over summer.

Fed outlook after benign US CPI

"The main event yesterday was the release of the latest US CPI report for July. The US dollar weakened initially after the report was released resulting in the dollar index falling to a low of 99.613 but it has since fully reversed all of those losses and climbed back up to the 100.00-level. The US dollar has proven resilient even as market participants have moved to further scale back Fed rate hike expectations."

"The US rate market is currently pricing in around 9bps of Fed hikes by the September FOMC meeting compared to around 12bps prior to the release of the US CPI report. There was initial relief amongst market participants that the CPI report for July did not provide any major surprises that could alter the outlook for Fed policy."

"Overall, the report supports our view that Fed is likely to leave rates on hold in September. However, it is unlikely that the US rate market will scale back rate hike expectations much further in the near-term given a hike still can’t be ruled out."

"The lack of progress to reopen the Strait of Hormuz and elevated energy prices continues to pose upside inflation risks in the near-term. At the same time, the lack of clear forward guidance from Fed Chair Kevin Warsh makes it harder to assess how they are likely to set policy going forward."

"The lack of follow through US dollar weakness after yesterday’s initial sell-off suggests USD stability is more likely over the summer."

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