USD recovery was short-lived ahead of next week FOMC meeting
|The US dollar got a fresh boost yesterday after the release of better-than-expected inflation report. The headline CPI gained 1.9%y/y, against median forecast of 1.8%, up from 1.7% in July. The core gauge also beat expectations of 1.6% by rising 1.7%y/y. This upside surprise may have renewed expectations of an upcoming tightening move from the Fed. However, many clouds remain on the horizon.
First of all, real average weekly earnings grew only 0.9%y/y, down from 1.1% in the previous month, suggesting that the significant recovery of real wage growth that started at the beginning of the year may have come to an end, which is definitely not of good omen for the Fed normalization cycle.
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Second, hurricanes Harvey and Irma have substantially blurred the Fed’s vision by distorting the economic data. Unfortunately, it will take months for the dust to settle down, which could prompt the Fed to act with caution. New York fed President Dudley mentioned this point as he argued that the hurricanes could affect temporarily the timing of the next rate hike.
The dollar recovery was short-lived as the greenback reversed gains against most of its peers. The single currency rose 0.13% to $1.1940. Commodity currencies were also better bid with the AUD, NZD and CAD rising 0.25%, 0.66% and 0.16%, respectively. We believe investors will remain cautious ahead of next Wednesday FOMC meeting as there is a growing sentiment that the Fed will play for time, once again.
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