Inflation to reignite the dollar?

Market reports
Thanim Islam
  • USD weakens as markets bet on end of Fed hike cycle
  • ECB Schnabel talks down higher-for-longer interest rates
  • EU inflation and US data on tap today


Another day of soft data from the US caused markets to bet that we may well be at the end of the Fed rate hiking cycle. ADP payroll came in lower at 177,000, and second estimates of GDP in Q2 came in lower at 2.1% - as did the core PCE number for Q2 which came in at 3.7%. The chances of an earlier rate cut by the Fed increased also, despite Fed narrative suggesting higher rates for longer. Equities continued to track higher – retracing earlier losses in the month, and as a result USD was sold off.

German inflation numbers suggested that inflation is continuing to ease in the country, but not as quickly as markets were anticipating, increasing the chances of a rate hike by the ECB in September.


Market rates

* Daily move - against G10 rates at 7:30am, 31.08.23

** Indicative rates - interbank rates at 7:30am, 31.08.23

Data points


  • GBP: BoE Pill
  • USD: Fed Bostic and Collins
  • EUR: ECB Guindos and Schnabel

Our thoughts

This morning ECB Schnabel has commented stating she cannot predict where the peak in interest rates will be, nor how long rates will have to be held at restrictive levels for. This is on account that prospects for the economy in Europe are more dire than ECB members had predicted in June. As a result, markets have eased expectations for a rate hike in September, causing the EUR to be weaker early doors. For clients interested in EUR we will be watching the release of the core CPI number today. Core CPI is currently expected to ease to 5.3%.

USD has been on the back foot so far this week after hitting 3-month highs last Friday. But this weakness in USD could well be short-lived should the Core PCE number this afternoon comes in higher (4.2% expected vs 4.1% prior) and ahead of US job numbers on Friday. It's worth noting that over the last 6 years the USD has outperformed in September, averaging gains of 1.2%. So this week's weakness on the currency could well be short-lived.

Chart of the day

Whilst past performance may not be a guarantee for future results, we can’t help but bring attention to the seasonal performance of USD in September over the last nine years. On average the USD index has gained by 1.28% in September, on the back of markets buying USD on end-of-quarter flows as well as safe haven demand due to underperformance of equity markets in the same month. Recently the index tested the highs seen in May before retreating this week on the back of soft US data. Should today's inflation numbers and tomorrow's job numbers come in strong, then these two factors could well be the catalyst to push the currency through the May high and start the seasonal trend for USD.

Source: Bloomberg Finance L.P.

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