6 days ago
Sticky US inflation lifts dollar, revives Fed hike bets
The U.S. dollar became stronger after new inflation numbers were released.
Prices rose a little more than experts had expected.
This made some investors think the Federal Reserve might raise interest rates later in the year.
The market’s estimated chance of a September increase rose to 40.1%.
However, analysts said the data were not strong enough to clearly prove that a rate increase was coming.
Investors were waiting for Kevin Warsh to speak at the Jackson Hole meeting of central bankers.
They were also watching Japan for clues about whether its central bank might raise rates in September.
The euro and some other currencies were mixed or weaker against the dollar.
The dollar rose after July U.S. inflation exceeded economists’ forecasts.
Annual PCE inflation held at 3.7%, while monthly inflation increased 0.2% in July.
Markets priced a 40.1% chance of at least a 25-basis-point September Federal Reserve hike, up from about 36%.
Investors awaited Federal Reserve Chair Kevin Warsh’s Jackson Hole remarks for guidance on future policy.
Markets also watched Bank of Japan officials, with an 87% probability priced for a September rate increase.
- Who
- The U.S. dollar, Federal Reserve policymakers, investors, the European Central Bank, and the Bank of Japan were central to the reports.
- What
- The dollar advanced as firmer U.S. inflation data kept expectations of a Federal Reserve rate hike alive.
- Where
- The moves occurred in global currency markets; one report was filed from New York.
- When
- The reports covered market moves on Wednesday and Thursday, ahead of the Jackson Hole symposium and September central-bank meetings.
- Why
- July inflation was slightly higher than forecast, while investors assessed possible Federal Reserve and Bank of Japan policy changes.
Dovish interpretation
Hawkish interpretation
Meaning of the U.S. data
Dovish interpretation
Analysts said the figures were not strong enough to give rate-hike supporters a clear victory, and unchanged consumer spending offered a less forceful signal.
Hawkish interpretation
Inflation and personal income exceeded forecasts, keeping the possibility of a Federal Reserve rate increase alive and nudging market expectations higher.
Expected Federal Reserve guidance
Dovish interpretation
Goldman Sachs economist David Mericle said Kevin Warsh was unlikely to provide direct policy guidance at Jackson Hole.
Hawkish interpretation
Investors and analysts viewed Warsh’s speech as an important test of rate expectations, while Boston Fed President Susan Collins said rates would need to rise soon unless inflation continued to decline.
European and Japanese policy
Dovish interpretation
Reuters reported that European Central Bank policymakers had little appetite to signal additional tightening after a possible September increase, while yen buying could remain restrained before Bank of Japan remarks.
Hawkish interpretation
ECB board member Isabel Schnabel said rates must rise further because inflation risks remained, and markets assigned an 87% probability to a September Bank of Japan rate hike.
Key facts
- Dollar index
- Rose to 99.145 in one report and 99.13 in another, with the latter described as an eight-day high.
- Annual PCE inflation
- Increased 3.7% in the year through July, unchanged from June and above the 3.6% forecast.
- Monthly PCE inflation
- Rose 0.2% in July, compared with a 0.1% forecast, after falling 0.1% in June.
- September Fed hike odds
- Markets priced a 40.1% chance of at least a 25-basis-point increase, up from about 36% before the data.
- Other U.S. data
- Second-quarter growth was revised to 1.5%, personal income rose 0.4% in July, and consumer spending was unchanged.
- Bank of Japan expectations
- Money markets priced an 87% probability of a September rate hike, according to Totan Tanshi.
- Selected currency moves
- The yen weakened to about 159.23-159.37 per dollar; sterling traded near $1.3592-$1.3593, while the euro traded near $1.1653-$1.1655.
Quotes
George Vessey
Lead FX and macro strategist at Convera in London
“Overall, because the headline was warm enough to prevent a dovish victory, those details weren't really strong enough to hand the hawks a clear win, so I wouldn't chase the rally at all.”
livemint.com
Sources
Related news
Dollar Rebounds as PCE Inflation Revives Federal Reserve Hike Bets
Dollar Jumps After Warsh Comments, Set for Weekly Gain
Dollar near two-month low as US inflation data awaited
Dollar slips as traders weigh Fed hike odds, jobs data
Dollar Mixed After Flat PPI as Fed Hike Bets Cool
Dollar Steady as Markets Await Warsh’s Jackson Hole Speech
BRICS Leaders Eye Local-Currency Trade, Not Common Currency
Rupee Slips Against Dollar Amid Oil and Tension
Rupee Climbs to Two-Month High on RBI Intervention
Rupee Falls to 95.56 as Crude Prices and Dollar Rise
Rupee Gains as Oil Prices Fall, RBI Supports Currency