Rate cut expectations soften after muted CPI report as US dollar rebounds
US YoY inflation slowed to 2.5% in August, boosting confidence in the USD. The dollar strengthened against AUD, EUR, and GBP, but lagged against CHF and JPY. Investors now expect a smaller, 25 bps rate cut.
Key points
- August US YoY inflation rate slowed to 2.5%, down from July’s 2.9%
- US Dollar Index climbed to 101.8 after inflation data release, strong against major currency pairs
- 10-year Treasury yield increased to 3.68% after CPI report
- Investors forecast a 25 bps rate cut, down from a 34% chance of a heavy rate cut
Inflation data release and 10-year treasury yield appear optimistic
The US YoY inflation rate has slowed down for the fifth consecutive month to an August rate of 2.5%, a solid step down from July’s rate of 2.9%. This was relatively in line with expectations, with headline YoY inflation lower than expected at 2.5% and core inflation MoM higher than expected at 0.3%. While this data is a mixed bag, it paints a healthy picture for lowering inflation without a dramatic fall, leading investors to favor a more regular 25 bps cut instead of a dramatic 50 bps one. This is the lowest inflation rate since February 2021, and today’s number was below analysts’ expectations of 2.6%. Shortly after this announcement, the US Dollar Index made a sharp climb to 101.8, marking a weekly high for the greenback.
US dollar up against most major currencies
It’s a good day for the US dollar, with it dominating within the AUD/USD, EUR/USD, and GBP/USD pairs. This strength is likely driven by the stronger-than-expected CPI data release this morning. Despite this, the US dollar is weaker today against the Swiss franc and the Japanese yen, known safe-haven currencies. This discrepancy suggests that despite increased confidence in the US dollar, some underlying concerns may be leading traders to seek refuge in these assets.
Forecast of smaller interest rate cuts after today’s economic data release
Today’s economic data release has led investors to forecast smaller rate cuts than initially anticipated. As of yesterday, there was around a 34% chance of a heavy rate cut, but today, this chance has been cut down to 15%, making a 25 bps rate cut look more realistic. The latest economic release, combined with this month’s CPI data, provides investors with a clearer picture of the Federal Reserve's potential course of action. Before the release, there was significant speculation about the possibility of a substantial interest rate cut. Additionally, the 10-year Treasury yield increased to 3.68% from 3.61% after the CPI report was released this morning, reflecting investor reactions to the lower-than-expected inflation rate. Both the inflation and 10-year Treasury yield data point to stabilization within the US economy, supporting an optimistic outlook that can help strengthen the US dollar.
What’s next for the US dollar?
Investors now forecast a smaller, more measured 25 basis points (bps) rate cut as a more realistic outcome this September 18th. This shift in expectations indicates that investors believe the Fed has confidence that the current monetary policy is sufficiently addressing inflation without the need for drastic measures. A smaller rate cut signals a balanced strategy, aiming to support economic growth while keeping inflation in check, rather than risking overstimulation of the economy. This suggests a stronger outlook for the US dollar as higher interest rates typically attract foreign investment seeking better returns, increasing demand for the currency. It also boosts investor confidence in the stability of the US economy, as it shows that inflation is being managed effectively without the need for severe intervention.
How to trade US dollar
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions on USD pairs
Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understand key terms. Once your strategy is developed, you can follow the above steps to open an account and get started trading forex.