US Dollar: CPI outcome guides Fed path – DBS

DBS Group Research economist Eugene Leow believes that upcoming US CPI data will play a significant role in the Federal Open Market Committee's (FOMC) September decision on monetary policy. Recent low inflation and a robust labor market have kept the odds of Fed rate hikes high, positioning US Dollar rates near 4.4% around 2.5 hikes.

The upcoming CPI data will be crucial for the FOMC meeting scheduled for next week. While recent labor market data has kept Fed hike expectations at 60%, it has not been enough to decisively influence investors. Instead, the focus should now be on inflation. Inflation figures have been surprisingly mild, with transport component increases proving less than anticipated.

Moreover, there are no signs of price pressures expanding. A CPI reading of 0.4% month-over-month (MoM) and 0.3% MoM for core CPI would be the minimum to persuade market participants to raise the odds of imminent tightening. On the other hand, a 0.2% figure in both categories would likely drive the odds of imminent tightening close to zero.

DBS Group Research believes that frontend USD rates are adequately priced at around 2-year rates of 4.4% for a hawkish Fed, and the recent worries about rising oil prices may be already embedded. With more than 2.5 hikes already factored in, there is little expectation for further rate hikes. A strong CPI print may lead the market to frontload the hike cycle, instead of pricing in additional hikes.