Indonesian Rupiah holds weak footing ahead of looming BI policy decision

• Bank Indonesia expected to hold interest rates unchanged following 100bps of previous hikes.
• US Dollar gains safe-haven support from escalating geopolitical tensions between the US and Iran.
• Fed rate hike expectations drop to 35% after weak US labor and inflation data.

USD/IDR remains in the positive territory after experiencing volatility, trading around 17,900 during the Asian hours on Tuesday. The pair continues to draw support from a weakening Indonesian Rupiah (IDR), driven by cautious domestic sentiment ahead of Bank Indonesia’s (BI) two-day policy meeting.

Markets widely expect the central bank to keep its benchmark interest rate unchanged under acting Governor Destry Damayanti. This comes after a cumulative 100 basis points in rate hikes implemented between May and June to bolster the local currency.

Indonesia rate pause seen as BI holds at 5.75%

Strategists at Brown Brothers Harriman note that Bank Indonesia (BI) is "widely expected to keep rates on hold at 5.75% for a second straight meeting" on Wednesday. They argue that BI "can afford to pause after delivering 100bps of tightening since May," suggesting the central bank has scope to maintain its current stance following the recent round of rate hikes.

Indonesia budget aims for stronger growth with tighter deficit control

Economists at UOB Group highlight that Indonesia’s 2027 fiscal plan is built around a firm growth ambition, noting that the budget “targets economic growth of 6.0%, supported by strategic public investment and prudent fiscal management, with the fiscal deficit projected to narrow to 2.40% of GDP.” This calibrated mix of growth-oriented spending and deficit consolidation is seen as central to the authorities’ effort to sustain momentum while maintaining fiscal discipline.

At the same time, the US Dollar (USD) is gaining minor ground from safe-haven flows tied to escalating geopolitical tensions between the US and Iran. US President Donald Trump stated he has no interest in renewing the expiring agreement with Iran, pointing to the active naval blockade of Iranian ports as leverage and reiterating his intention to declare the vital waterway as total American territory.

However, further upside for the Greenback remains constrained as hawkish expectations surrounding the Federal Reserve fade. A recent, unexpected decline in July US Nonfarm Payrolls alongside modest consumer price inflation figures has weakened the case for imminent monetary tightening. Consequently, CME FedWatch Tool data shows the probability of a Fed rate hike at the next meeting has fallen to 35%, down from 47% a month ago.

Dollar slides as soft US data and fiscal angst weigh on USD

Strategists at Scotiabank note that the USD “got roughed up a bit last week” and that “dollar trends continue to soften broadly this morning,” pushing the DXY “just below the base of the August consolidation range and to the lowest point since early June.” They argue that “soft US data reports are dampening Fed tightening expectations—even so the 25bps of tightening still priced in by year-end is too much from our perspective”—while “clear signs of market angst about US fiscal dynamics” are emerging, reflected in “the steepening US yield curve.” Against this backdrop, Scotiabank expects the Dollar to remain under pressure near term as US fundamentals compare less favourably with improving data surprises in Canada and the Eurozone.