US inflation rules out jumbo Fed cut, Fed to strike dovish note at meeting
The dollar is trading a touch stronger this afternoon as the August US inflation report appears to have effectively ruled out the possibility of a jumbo interest rate cut from the Federal Reserve this month. While the main inflation measure came in moderately weaker than estimates, and fell to its lowest level since February 2021, the core inflation rate remained stuck at July levels. There was also a larger-than-expected 0.3% jump in monthly core inflation, which marks the fastest pick-up in underlying consumer prices in four months.
We don’t think that today’s data will be enough to force the FOMC to deliver a 50 basis point rate cut at its meeting next week, which is now only around 15% priced in by markets.
We do, however, think that the Fed will strike a dovish note in its communications following the September meeting, indicating to markets that the cooling in the US labour market has accelerated, and that an aggressive pace of cuts may be required in order to support it.
Author
Matthew Ryan, CFA
Ebury
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.
