Even as US inflation statistics moderated, Lee Hardman of MUFG observes that the US dollar has continued to rise, with the Dollar Index hitting the June year-to-date high of almost 101.80. The possibility of rapid rate hikes by the Federal Reserve is decreased by the revised core PCE statistics, which indicate slower underlying price pressures. However, following the data, short-term US rates and the dollar swiftly recovered.
Despite lower inflation, the dollar is strengthening.
"Even after recent Fed rhetoric, the US dollar's upward momentum has persisted, and lower US inflation data should serve to temper expectations for more aggressive Fed hikes. The softer-than-US PCE deflator result for August swiftly supported New York Fed President Williams' statement that "there is no need for hurry" following this month's rate hike and they can take their time to study fresh data before tightening policy further."
"There is more proof of a slowdown in the Fed's preferred indicator of underlying inflation pressures following the downward revisions. Looking back at the time since the start of the US-Iran war, the six-month annualized rate of growth has slowed to 2.7% in August from 3.3% in February. The three-month annualized rate of growth has dropped to just 2.1%.
"Although maybe not as rapidly as they would like, the report should give some certainty that some progress has been made toward reaching their inflation target. It reduces the likelihood that the Fed will raise interest rates as sharply as they are already pricing into the US market, which anticipates three to four hikes in the coming year. Prior to the US midterm elections, the likelihood of a back-to-back hike as early as next month has continued to decline.
"As they continue to choose when to raise rates further, the Fed will now wait to see the upcoming NFP report on Friday and the US CPI report for September on October 14."
Despite lower inflation, the dollar is strengthening.
"Even after recent Fed rhetoric, the US dollar's upward momentum has persisted, and lower US inflation data should serve to temper expectations for more aggressive Fed hikes. The softer-than-US PCE deflator result for August swiftly supported New York Fed President Williams' statement that "there is no need for hurry" following this month's rate hike and they can take their time to study fresh data before tightening policy further."
"There is more proof of a slowdown in the Fed's preferred indicator of underlying inflation pressures following the downward revisions. Looking back at the time since the start of the US-Iran war, the six-month annualized rate of growth has slowed to 2.7% in August from 3.3% in February. The three-month annualized rate of growth has dropped to just 2.1%.
"Although maybe not as rapidly as they would like, the report should give some certainty that some progress has been made toward reaching their inflation target. It reduces the likelihood that the Fed will raise interest rates as sharply as they are already pricing into the US market, which anticipates three to four hikes in the coming year. Prior to the US midterm elections, the likelihood of a back-to-back hike as early as next month has continued to decline.
"As they continue to choose when to raise rates further, the Fed will now wait to see the upcoming NFP report on Friday and the US CPI report for September on October 14."
