US Dollar Eyes CPI Data as FOMC Members Go Dark: DXY Weekly Outlook

US Dollar Fundamental Forecast: Neutral

• US Dollar cooled after the ECB boosted the Euro with a jumbo rate hike
• FOMC members go dark as markets see solid chance for a 75-bps hike
• The US consumer price index (Aug) offers the next cue for USD direction

US Dollar strength cooled last week. The DXY Index rose to its highest level since June 2002, but that strength faded, and prices moved lower throughout the second half of the week. Still, the blistering rally of last year remains intact. The Greenback’s fundamental backdrop, consisting of a relatively aggressive central bank and resilient economy, remains sound. The DXY Index measures a basket of six currencies, with the Euro being the largest among those. Indeed, the European currency explains much of the story for the DXY’s lull.

The Euro received a boost after the European Central Bank hiked lending rates by 75 basis points on Thursday. The ECB hasn’t delivered a rate hike that big since 1999, back when the eurozone was in its infancy. And ECB President Christine Lagarde said that more rate hikes are coming. European bond yields surged, which tightened the spread between Treasury yields. While a committed ECB is bullish for the European currency, the country faces a potential energy crisis this winter along with broader headwinds compared to the United States. The Federal Reserve has more scope to tighten policy, which puts into question how long the Euro would be able to rally against the Greenback.

The Federal Open Market Committee (FOMC) entered a blackout period on Saturday, barring members from commenting on monetary policy. Rate markets see an 85% chance for a 75-basis point hike on September 22. On Thursday, Federal Reserve Chair Jerome Powell signaled the central bank’s commitment to getting prices under control as well as cautioning that long-lasting inflation poses a threat to the Fed’s policy tools. The consensus on the pace of hikes beyond the next meeting is less certain; more rate hikes are coming, but they may be smaller.

The Dollar’s main threat in the week ahead is the United States consumer price index (CPI) for August. The data, due Tuesday, is expected to cross the wires at an 8.1% annual rate, which would be down from 8.5%. However, the CPI’s core component—a measure that strips out volatile food and energy prices—is forecasted to rise to 6.0% from 5.9%. The most bearish outcome for the USD would be a miss on both, as it may shift Fed bets to a smaller 50-bps move. That would likely put pressure on USD-sensitive short-term Treasury yields.

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--- Written by Thomas Westwater, Analyst for DailyFX.com

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