US Dollar: CPI keeps USD in tight ranges – OCBC

OCBC’s Sim Moh Siong and Christopher Wong note the US Dollar (USD) softened as Fed hike expectations moderated and the US yield curve steepened. They argue that without a strong upside surprise in United States (US) Consumer Price Index (CPI), the USD should stay rangebound, supporting carry trades. Debasement concerns and scrutiny of Fed independence are seen underpinning Gold, while upcoming US CPI, PPI and retail sales will steer Fed expectations.

Dollar tied to upcoming CPI data

"The USD softened over the past week as Fed rate hike expectations moderated and the US yield curve steepened. Unless this week's CPI report delivers a meaningful upside surprise, the USD is likely to remain trapped in narrow ranges. July's soft payrolls report should keep the Fed patient beyond September, with markets unlikely to price a September hike as the base case without a firmer inflation signal."

"In our view, core CPI would need to print at 0.3% MoM or higher in July, above the 0.2% consensus forecast, to materially lift expectations of a September rate hike. A rangebound USD, combined with a constructive risk backdrop, should continue to support carry trades despite ongoing volatility in oil markets. Oil prices eased on hopes that the Strait of Hormuz could reopen, but Iran's firm conditions for Washington suggest any near-term boost to energy supply is likely to be limited."

"Meanwhile, debasement concerns have returned to the fore, adding pressure on the USD and helping gold rebound from what increasingly appears to be a floor near USD4,000/oz. Several recent developments have renewed scrutiny over Fed independence."

"First, the Trump administration reportedly made another attempt to remove Fed Governor Lisa Cook. If successful, President Trump would gain an additional opportunity to appoint a Fed governor. Cook has until 26 August to respond. Second, the Wall Street Journal reported that President Trump has maintained frequent contact with Fed Chair Kevin Warsh, discussing issues ranging from Iran to AI. While there is no evidence that monetary policy has been directly influenced, the relationship appears less distant than the convention typically observed between the White House and the Fed."

"Following the weak July payrolls data, we do not believe a Fed decision to keep rates unchanged in September would be viewed as a credibility issue. However, if inflation remains sticky, the September meeting could become an important test of the Fed's inflation-fighting credentials. In that scenario, the USD outlook will depend heavily on whether policymakers choose to reinforce their inflation mandate through tighter policy."

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