United States Dollar Index gains support amid hawkish Fed policy stance

The US Dollar Index (DXY) has been gaining strength for three consecutive days, currently trading at around 100.70 during Asian trading hours on Wednesday. This upward movement is attributed to the Federal Reserve's (Fed) hawkish policy stance. Following a 25 basis point increase that brought the benchmark interest rate target to the 3.75%–4.00% range, Fed policymakers have indicated that another rate hike could occur before the year's end.

Financial markets are factoring in this trajectory, with the CME FedWatch Tool displaying an 89.2% probability of a December rate increase. Investors are now focusing on the preliminary US PMI data expected to be released later on Wednesday. TD Securities suggests that the August CPI release has prompted a preliminary look into their September projection, which is still subject to further refinement.

Economists note that their current projection is based on multiple assumptions that may change as the month progresses and more data becomes available, particularly for volatile segments such as gasoline prices, hotel rates, and airfares. The general expectation is that headline CPI will rise by nearly 8%, driven by an 8% jump in gasoline prices and firmer food prices, while core CPI is anticipated to slow, with inflation in services meant to revert to the mean and supercore easing after August’s surge.

Fed Chair Jerome Powell's remarks portray a labor market that is balanced rather than overheated, with consumer balance sheets remaining solid and spending expected to continue as long as jobs remain healthy. This outlook reduces immediate recession concerns but simultaneously dampens inflationary labor pressures compared to historical averages.

Powell's comments also indicate a preference for a soft-landing scenario, but stress the Fed's inability to rely solely on market signals to keep rates restrictive enough. This cautious approach to financial conditions and inflation maintains a modestly hawkish tone, despite the FXS Speechtracker score remaining unchanged at 5.6/10 from its established baseline of 5.7/10.

Skepticism about the primary drivers of productivity gains being primarily driven by artificial intelligence (AI) signals a limited confidence in a rapid supply-side disinflation narrative, reinforcing the view that policy cannot heavily rely on structural tailwinds. The FXS Fed Sentiment Index dropped by 2.11 points to 148.39, signaling a slight pullback in perceived hawkishness, although the overall stance remains firmly above the neutral 100 level, implying that the Fed remains solidly in a hawkish position, with policy risks skewed towards maintaining elevated rates rather than making rapid cuts.