US Dollar: CPI outcome guides Fed path – DBS

DBS Group Research economist Eugene Leow argues that upcoming US CPI data will be crucial for the FOMC’s September decision on policy. He notes that recent benign inflation and firm labour market data have kept Fed hike odds elevated, with around 2.5 hikes already priced into frontend USD rates near 4.4%, limiting further upside in yields.

Frontend USD rates seen largely priced

"This week’s CPI data will prove pivotal for the FOMC meeting next week. Firm labour market data kept Fed hike bets elevated (60% chance of a hike in September) but was not sufficient to decisively nudge investors firmly in one direction."

"Instead, the focus now lies squarely on inflation. The past few inflation prints have been very benign as increases in the transport component proved surprisingly muted."

"Moreover, there are no signs that price pressures are broadening out. CPI and core CPI of 0.4% MoM sa and 0.3% MoM respectively may well be the minimum that would nudge market participants to increase the odds of imminent tightening. Conversely, a 0.2% print in both figures would probably see the odds of imminent tightening fall closer to zero. "

"In any case, we think that frontend USD rates are adequately priced (2Y around 4.4%) for a hawkish Fed and probably already embed some of the worries from rising oil prices (Brent crude prices are trading around USD 99/bbl)."

"With just over 2.5 hikes factored in, we do not think there is much upside in rates are here on. A strong CPI print would likely lead the market to frontload the hike cycle, rather than to price in even more hikes."

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