US Dollar Outlook Hinges on Inflation Report Amid Fed Blackout Period

US Dollar Talking Points

The update to the US Consumer Price Index (CPI) is likely to sway the US Dollar during the Federal Reserve’s blackout period as the central bank braces for a transitory rise in inflation.

Fundamental Forecast for US Dollar: Neutral

The US Dollar Index (DXY) has cleared the opening range for September as it quicky retraced the decline following the weaker-than-expected Non-Farm Payrolls (NFP) report, but the Greenback may face headwinds ahead of the Federal Open Market Committee (FOMC) interest rate decision on September 22 as inflation is expected to slowdown for the first time this year.

The headline reading for the US CPI is expected to slip to 5.3% after holding steady at 5.4% for two consecutive months, while the core rate of inflation is projected to narrow for the second straight month in August. Evidence of slower price growth may generate a bearish reaction in the US Dollar as the Federal Open Market Committee (FOMC) acknowledges that “economy had not yet achieved the Committee’s broad-based and inclusive maximum-employment goal,” and the central bank may retain the current path for monetary policy as Chairman Jerome Powellinsists that “we have much ground to cover to reach maximum employment.”

However, signs of sticky inflation may trigger a bullish reaction in the US Dollar as it puts pressure on the FOMC to normalize monetary policy sooner rather than later, and it remains to be seen if Fed officials will implement material changes to the Summary of Economic Projections (SEP) as “some participants noted that there were upside risks to inflation associated with concerns that supply disruptions and labor shortages might linger for longer than currently anticipated.”

With that said, fresh developments coming out of the US economy are likely to sway the Greenback ahead of the next Fed rate decision as the central bank enters its blackout period from the media, but the break of the monthly opening range raises the scope for a further advance in the US Dollar Index (DXY) as it appears to have reversed course ahead of the August low (91.82).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong