Dollar wavers after US inflation report

  • September still a hold, while swap contracts suggest odds a 49.3% chance of a hike at the November 1st FOMC meeting
  • Supercore inflation rate rises most since March
  • Two-year Treasury drifts lower by 2.1 bps to 4.999%

Inflation is not easing enough for the Fed to abandon their hawkish stance.  The upside surprises might be small, but that should keep the hawks in control.  Core inflation heated up for the first time in six months and that should have markets leaning towards one more Fed rate hike in November.  Inflation will likely still be running well above the Fed’s 2% target for the rest of the year, but a weaker consumer supports the case the disinflation process will remain intact. ​



Source: BLS

This was a complicated inflation report. Everyone knew that gas prices were sharply higher and that the housing market is still seeing elevated prices(house prices are now rising, while rents have eased).  The headline inflation read showed CPI increased 0.6% in August from a month ago, which was the highest reading since June 2022.  The annual inflation reading rose from 3.2% to 3.7%, a tick above expectations.


Market reaction

A weakening US consumer will continue as they battle surging gasoline prices, stubborn shelter prices, and increasing medical costs. US stocks are wavering as this inflation report will keep the Fed pushing the ‘higher for longer’ narrative. If Wall Street remains convinced that the labor market is cooling, that will do the trick for getting inflation closer to the Fed’s target.

The US dollar and Treasury yields were initially higher given the core CPI delivered an upside surprise, but once traders digested the entire report, the bond market reversed course. Core inflation rose 0.3%, which was due to the rounding of 0.278% which somehow makes it a lot less hot.  Rent makes up 40% of Core PCE and prices posted the smallest gain since the end of 2021. Expectations are elevated for the consumer to be significantly weaker and that we could have a soft holiday spending season, which should support the disinflation process.

Dollar  5-minute Chart

The dollar is wavering as Wall Street wasn’t able to come up with any definitive stances on when the Fed will signal the all clear that policy is restrictive enough.  The dollar’s strength is most notably against the Japanese yen, while the euro will likely react to Thursday’s ECB rate decision.  Following yesterday’s Reuters report that the ECB will have inflation projections above 3%, markets appear to be leaning towards a rate hike.


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Ed Moya

Ed Moya

Senior Market Analyst, The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.
Ed Moya