US Dollar Rises on Increased Inflation

The U.S. economic data released on Wednesday indicated that inflation increased for the month of August. Despite this, market expectations on the pace of rate rises from the Federal Reserve were not much affected by the data. This caused the dollar index to rise.

According to data provided by the Labor Department, the consumer price index rose by 0.6% in the most recent month, marking the highest growth since June 2022. This increase was driven mostly by increases in the price of gasoline. The Consumer Price Index (CPI) rose by 0.3% when food and energy costs were stripped out of the calculation, but this gain was somewhat offset by a drop in the cost of used automobiles and trucks.

The statistics did not shake the widespread belief that the Federal Reserve will maintain its current interest rate policy when it makes its decision the following week following the end of its meeting on September 19-20. According to the CME's FedWatch Tool, the market is pricing in a 97% likelihood that the Fed will retain rates at their present level, which is an increase from the 92% chance that was priced in on Tuesday.

The likelihood of a 25-basis-point increase at the meeting in November, which had been gradually increasing over the week, has decreased to 40.8% from 41.1% in the last day.

"For me, CPI didn't really change the picture that much," said Marvin Loh, who is a senior global macro strategist at State Street in Boston. "

If you believe that they need to go on another trek, then you continue to believe that they need to go on another hike. If you believe that they are finished, then there is probably enough material in this area to finish it. There was nothing in today's figure that really altered next year's cut that much, which is probably more significant than how you look at next year's cutbacks. Most crucially, there was nothing in today's number that impacted next year's cut that much.

The dollar index, which monitors the value of one currency relative to a group of other currencies, increased by 0.19%, reaching 104.79.

In a note released on Wednesday, the head economist at Goldman Sachs, Jan Hatzius, stated that the company does not anticipate that the CPI data will have an effect on the result of the meeting that will take place the following week. He continues to believe that the Federal Reserve will view a final rise at the meeting in November as being unnecessary.

Barclays has not changed its prediction that the Fed would hold off on raising interest rates over the upcoming week, but they do anticipate one more increase of 25 basis points before the end of the year.

Tomorrow will see the publication of yet another inflation report in the shape of the producer price index (PPI), as well as statistics about retail sales.

Ahead of Thursday's policy statement from the European Central Bank (ECB), the value of the euro decreased against the United States dollar by 0.22% to reach $1.073.

Reuters reported on Tuesday that a person who had direct knowledge of the rate setters' conversations stated that the central bank anticipates inflation in the euro zone to continue over 3% in the coming year, which supports the argument for a tenth consecutive hike in interest rates this week.

After statistics indicated that the UK economy dropped in July at an unexpectedly steep rate, sterling slipped down 0.08% to $1.2485. This occurred as gross domestic product shrank 0.5% from June, which was far worse than the 0.2% contraction that was anticipated.

The Japanese currency continued to give back a significant gain that it had on Monday, which resulted in the highest one-day advance for the yen in two months. This resulted in the dollar gaining 0.27% versus the yen, bringing the exchange rate up to 147.45.

As a result of comments made over the weekend by the Governor of the Bank of Japan (BOJ), Kazuo Ueda, expectations increased that the central bank could move away from its current policy of negative interest rates, which caused the yen to surge to begin the week. However, these expectations were subsequently dampened after an influential ruling party lawmaker indicated his preference for an extremely loose monetary policy on Tuesday.

As the Bank of Japan (BOJ) continues to be a dovish outlier among global central banks, the yen has been under pressure against the dollar. This has been especially true ever since the Federal Reserve began its aggressive rate-hike cycle in March of 2022.

Since the yen's value dropped over the 145 per dollar level a month ago, traders have been keeping a watchful eye out for any signals that Japan would intervene in the currency market in order to strengthen the yen. This level prompted the government to make their first intervention to purchase yen since 1998, which occurred exactly one year ago.