US Dollar: CPI volatility risk and limited upside – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes the US Dollar (USD) is supported by recent risk aversion and a modestly hawkish Federal Reserve (Fed) repricing after US August Producer Price Index (PPI), but stresses that August Consumer Price Index (CPI) will be decisive for next week’s Fed meeting. A hot CPI would seal a hike and support the Dollar, while a cool print favors a hold and downside via dovish repricing. Even with a hike, Haddad doubts USD can make new cyclical highs as other central banks also tighten.

CPI outcome to steer Fed expectations

"USD is holding on to yesterday’s gains, triggered by oil-driven risk aversion and a brief hawkish Fed repricing after the US August PPI. PPI was broadly in line with expectations, but a few components feeding into PCE ran hot."

"Regardless, today’s pivotal August CPI report will be the main arbiter of next week’s Fed decision. Fed funds futures price in 68% odds of a 25bps hike to 3.75-4.00% on September 16."

"As such, a hot CPI print would all but seal a September hike and underpin a firmer USD. A cooler reading would strengthen the case for a hold and leave USD vulnerable to a dovish Fed repricing."

"More importantly, even if a September Fed hike becomes a done deal, we doubt USD will make new cyclical highs because tightening by other major central banks limits policy divergence."

"Risks around the US August CPI print are finely balanced, setting the stage for an exceptionally volatile market reaction. The August pick-up in the ISM Prices Paid index suggests upside inflation risks have yet to recede."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)