US Dollar: Fed path and credibility in focus – Commerzbank
Commerzbank’s Antje Praefcke notes that the FOMC is widely expected to raise the federal funds rate by 25 basis points after stronger-than-expected August inflation. She argues that a surprise pause would hurt Fed credibility and the Dollar, while a hike is largely priced in.
The Federal Open Market Committee (FOMC) is widely anticipated to raise the federal funds rate by 25 basis points following stronger-than-expected inflation in August. Commerzbank's Antje Praefcke warns that a surprise pause in rate hikes could negatively impact the Fed's credibility and the value of the U.S. dollar. In contrast, a hike is already priced in.
Moving forward, the dollar's trajectory will likely hinge more on macro data, as Chairman Jerome Powell prefers avoiding forward guidance. The upcoming FOMC meeting is particularly noteworthy, not only due to the potential rate increase but also because the Fed's stance on future policy remains ambiguous. The market is likely to view further hike expectations as confirmation of an increasingly hawkish stance, potentially bolstering the dollar.
Nonetheless, the dollar's reaction to the Fed meeting is notoriously unpredictable, with Chairman William Dudley's leadership adding uncertainty to the equation. Meanwhile, the AUD/USD pair maintains a bearish trend, hovering near a monthly low. The U.S. dollar is trading near a two-week high, supported by the prediction of a rate hike and concerns over oil-driven inflation, which are pushing up U.S. bond yields to multi-year highs.
Additionally, geopolitical tensions in the Middle East further strengthen the U.S. dollar's status as a safe-haven currency. However, USD/JPY reaches a fresh one-week high above 155.00 in the Asian session, buoyed by expectations of a stronger U.S. dollar. Oil-driven inflation fears and the anticipated rate hike continue to bolster U.S. bond yields.
Nonetheless, USD/JPY remains below the mid-155.00s, as market participants remain cautious ahead of the Fed decision and the Bank of Japan's meeting, set to begin on Thursday. Gold holds modest gains in the European trading session but remains below $4,350, with the U.S. dollar easing from its two-week high due to profit-taking.
Traders are hesitant to make aggressive directional bets and prefer to wait, observing the key central bank event risk. The FOMC's decision is deemed the most critical component, with recent hawkish rate repricing triggered by a strong U.S. August jobs report. However, the latest CPI print for August proved more influential. Japan's ultra-low interest rates have historically provided a cost-effective funding source for global investments, but the Bank of Japan's policy tightening this week may alter that advantage.
Written by urgent.news from FXStreet's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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