|

August CPI makes Fed decision a 'close call'

"Today's August CPI report delivered a modest upside surprise that likely narrows the ambiguity around next week's Fed decision. The firmer core print suggests underlying price pressures remain stickier than the disinflation narrative implies, and should, we think, be just about enough to sway the committee's naysayers toward a hike.

"The decision itself is set to be a close call, however, and the doves on the committee will not be without ammunition. They will likely point to annual core inflation having now fallen for three straight months, with no clear signs of second-round effects.

"Rising Treasury yields further complicate matters, as they are already doing some of the Fed's tightening for it, while raising the risk that a hike deepens the sell-off in an already strained debt market.

"Futures have moved to reflect the hawkish read and are now pricing in around a 90% chance of a rate increase next week. We would argue, however, that the strongest case for a hike now rests on the Fed preserving its inflation-fighting credibility, as a surprise hold could signal to markets that the committee is willing to tolerate a slower return to target than its mandate implies.

"Close call or not, standing still may now be the bigger gamble."

Author

Matthew Ryan, CFA

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

More from Matthew Ryan, CFA
Share:

Editor's Picks

AUD/USD eyes 100-SMA hurdle near 0.7035 as hawkish RBA counters firmer USD

AUD/USD regains positive traction on Tuesday and climbs to 0.7030 during the Asian session, reversing the previous day's corrective slide from a one-month high as hawkish RBA rate expectations continue to support the Aussie. Spot prices, however, remain below the 100-day SMA pivotal resistance amid a firmer US Dollar as traders brace for Australia’s September CPI report on Wednesday ahead of the Fed rate decision.

USD/JPY sticks to modest gains above 157.50 as traders await Fed, BoJ meetings

USD/JPY attracts buyers for the third straight day, recovering further from a one-month low ahead of Wednesday’s FOMC decision and the BoJ policy update on Friday. Meanwhile, expectations that the BoJ may hold off on aggressive rate hikes weigh on the Japanese Yen, and the US Dollar advances to a nearly two-week high, supporting the currency pair.

Gold advances modestly past $4,000

Gold looks to consolidate Tuesday’s humble gains just above the key $4,000 mark per troy ounce. Indeed, the precious metal adds to Monday’s bounce despite the better tone in the US Dollar, mixed US Treasury yields and steady caution ahead of the FOMC event on Wednesday.

Pi Network stalls as weak crypto sentiment caps recovery

Pi Network (PI) holds steady above $0.0760 at press time on Tuesday, stalling after a roughly 2% rebound the previous day. The broader market's weak sentiment and reduced trading volume weigh on the PI token. The technical outlook is bearish, with price capped below a long-term resistance trendline and weak momentum.

France tests the Euro's nerve: What the OAT spread is telling FX traders
France's 10-year borrowing premium over Germany hit its widest since the 2011 debt crisis last week. With public spending above 57% of GDP, unrest on the streets and a presidential election next spring, cuts look unlikely. If Paris cannot trim, the bill may be paid quietly through financial repression.
What November 3 means for the Fed's rate path and the US Dollar

The USD faces a decisive period ahead of the November 3 midterm elections. While markets anticipate another interest rate increase from the Fed in December, the battle for control of Congress could reshape fiscal policy expectations and, indirectly, the path of US monetary policy in 2027.