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September Fed hike hangs on today's 'critical' inflation data, 'unusually high' Dollar 'volatility'

The big news out of the US this week has been that President Trump plans to hand a $5,000 dividend to every American adult should the Republicans maintain full control of Congress following November’s midterm elections - a desperate attempt to change the fortunes of the party that has clearly taken a hit in the polls of late.

While this has raised fresh fears over US fiscal sustainability, we are not assigning too much weight to his remarks, as a) it's unlikely to work, given voters have shown limited appetite for one-off payments as an antidote to broader affordability concerns, and b) it's far from clear he would be legally able to force this through, with the plan requiring congressional approval rather than unilateral executive action.

All eyes now turn to this afternoon’s US inflation report - seen as critical for the outcome of the Federal Reserve’s September meeting next week.

Economists are pencilling in a 0.4% MoM print in the headline number and an unchanged 0.2% in core.

We think that even a 0.1 percentage point beat in either of these two data points will be enough to solidify bets in support of a hike next week and that would likely be enough to bring enough FOMC voting members on side.

A number bang on or below consensus, however, could mean that futures price out a hike - such is how finely balanced the decision is. We expect to see unusually high volatility in the dollar surrounding the release of the data.

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.

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