US Dollar: Markets remain hawkish after CPI – ING

ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner note that the Dollar strengthened after an in-line US CPI, as markets had positioned for a hotter print. Despite core inflation running at a 1.6% three‑month annualised pace, Fed expectations remain hawkish, with 9bp still priced for September and a full 25bp hike for December, keeping FX volatility subdued into the Jackson Hole Symposium.

Dollar supported by stubborn Fed pricing

"The dollar had a short-lived negative reaction to the spot-on consensus 0.1% headline and 0.2% core month-on-month CPI print yesterday. The driver was a small dovish repricing in Fed rate expectations, which told us that markets were positioned for a slightly hotter print than consensus. In any case, the release did not provide a conclusive answer for front-end rates and FX direction, and the dollar ended the day stronger, perhaps on some net long rebuilding after this round of US data."

"In our assessment, core inflation running at a 1.6% three-month annualised is weakening the case for Fed tightening. But markets remain hawkish. The jobs and CPI reports have together knocked 5bp off September FOMC expectations, but 9bp remains in the price."

"This tells us two important things for FX. First, there is reluctance to price out further Fed tightening, which is keeping dollar bulls active. Hawkish Fed communication is the main culprit."

"Next week’s FOMC minutes should offer some insight into the Committee’s latest thinking, but unless we see a major surprise in today’s PPI data or other second-tier releases over the coming weeks, Fed pricing may settle and FX volatility may compress further. Even so, we expect Fed communication to gradually soften its hawkish tone and keep risks on the downside for USD."

"In all this, the Gulf situation may regain some relevance for FX, in particular through the risk-sentiment implications of the Strait of Hormuz negotiations."

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