USD: Three cuts validated – ING

Thursday’s US CPI report showed slightly hotter than expected headline inflation (0.4% MoM), while the more closely monitored core rate rose by 0.3% MoM in line with consensus. What matters the most is the limited tariff impact, ING's FX analyst Francesco Pesole notes.

Balance of risks for the USD remains tilted to the downside

"Price increases were driven by airline fares, used cars, shelter, food, and energy, while recreation and medical care saw declines. Notably, core goods excluding autos rose just 0.1%, suggesting that companies are currently absorbing tariff costs in their profit margins, in line with what PPI trade services data showed earlier this week. It’s far from guaranteed that this profit-squeezing is sustainable, but for now, markets are receiving validation of Fed dovish bets."

"And even more validation is coming from job market news. Initial jobless claims unexpectedly spiked from 236k to 263k in the week to 6 September, the highest since October 2021. This could be a signal of increasing layoffs amid an already soft hiring environment. Here is our preview of next Wednesday’s FOMC meeting. We are aligned with the markets and consensus in expecting a 25bp cut, to be followed by similar reductions in October and December. The data-led dovish repricing has now made three cuts firmly the markets’ base case too (72bp priced in by December)."

"The dollar’s drop yesterday looked substantial on paper, but our model shows that the greenback is expensive relative to the latest short-term rate swings against most of the G10. We expect dollar weakening as the Fed starts cutting, even if now priced in, as cheaper funding costs can further encourage USD selling for hedging purposes. Today, we’ll see the University of Michigan surveys, keeping a close eye on inflation expectations, which currently stand at 4.8% for the year-ahead and 3.5% for 5-10 years. The balance of risks for the dollar remains tilted to the downside."