US Dollar: Crude rally and CPI risks shape path – BBH

Brown Brothers Harriman’s Elias Haddad highlights the impact of crude oil prices nearing $100 per barrel on financial markets. This surge in oil prices is pressuring stocks and bonds while providing a modest boost to the US Dollar. However, Haddad emphasizes the significance of the upcoming US August Consumer Price Index (CPI) report on Friday, as it will play a crucial role in shaping the Federal Reserve’s decision at their September 16 meeting.

A robust CPI reading would likely advance a rate hike and bolster the Dollar’s value, whereas a weaker report could prompt a more dovish stance and weaken the Dollar. The rally in crude oil prices is already affecting financial markets, with stocks and bonds facing downward pressure and the US Dollar gaining a slight advantage. Despite the recent price hikes in crude oil, the US Dollar has seen a modest improvement, but the Federal Reserve’s September 16 meeting will ultimately determine the path forward.

Haddad also notes that even if a September Fed hike is inevitable, the US Dollar may not reach new cyclical highs due to tightening policies by other major central banks, such as the European Central Bank’s anticipated 25 basis point increase on Thursday. The upcoming August New York Fed consumer expectations survey will provide further insight into long-term inflation expectations and help confirm whether they remain stable.

The Australian Dollar (AUD) is currently trading above 0.7200, near its highest level since May 14, as the Japanese Yen's rally outweighs support from hawkish Federal Reserve expectations and geopolitical tensions. However, a strong Japanese Yen may be supported by the upcoming rate hike from the Reserve Bank of Australia (RBA) later this month.

Meanwhile, mixed China trade balance data could impact the AUD's performance. The US Dollar has rebounded from a six-month low against the Japanese Yen, trading above 154.00, but this upward movement appears to be a technical correction. Factors such as upbeat wage growth data and the Japanese Yen's Q2 GDP revision continue to support the Yen, as the Bank of Japan is expected to raise rates later in the week.

Although the oil market may appear calmer compared to previous months, diesel fuel has emerged as a different story. The US diesel crack spread, which measures the premium of ultra-low sulphur diesel futures over West Texas Intermediate (WTI), has recently surged above $100 per barrel, reaching an intraday record of just over $102.00.