US Dollar: Upward momentum holds as inflation eases – MUFG

MUFG’s Lee Hardman notes the US Dollar has extended gains, with the Dollar Index reaching the June year-to-date high around 101.80, even as US inflation data softened. Revised core PCE figures show slower underlying price pressures, reducing the likelihood of aggressive Federal Reserve rate hikes. Nonetheless, short-term US yields and the Dollar quickly recovered after the data.

Dollar strengthens despite softer inflation

"The US dollar’s upward momentum has continued even after recent Fed rhetoric and softer US inflation data should help to dampen expectations for more aggressive Fed hikes. New York Fed President Williams message that “there is no need for urgency” following this month’s rate hike, and they can take their time to review additional data before tightening policy further” was quickly backed up by the release of the softer than US PCE deflator report for August."

"After the downward revisions, there is clearer evidence of a slowdown in the Fed’s preferred measure of underlying inflation pressures. The three-month annualized rate of growth has fallen to just 2.1%. Looking back at the period since the US-Iran conflict began, the six-month annualized rate of growth has slowed to 2.7% in August down from 3.3% in February."

"The report should provide some reassurance that there has been some progress towards meeting their inflation goal, although perhaps not as quickly as they would like. It makes it less likely that the Fed will hikes rates as aggressively as currently priced into the US market which is expecting three to four hikes in the year ahead. The probability of back-to-back hike as soon next month ahead of the US mid-term elections has continued to fall."

"The Fed will now wait to see the upcoming NFP report on Friday and US CPI report for September on 14th October as they continue to assess when to hike rates further."

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