Dollar Trade Could Be Volatile After Mixed U.S. Inflation Data

Dollar Trade

The U.S. dollar traded in a narrow range on Wednesday after the release of mixed inflation data for August. The consumer price index (CPI) rose by 0.3% month-on-month, lower than the expected 0.4%, but the core CPI, which excludes food and energy, was in line with the forecast at 0.1%. The annual inflation rate slowed down to 5.3% from 5.4% in July, while the core inflation rate dipped to 4% from 4.3%.

Dollar Trade

Dollar Index Remains Below 93

The dollar index, which measures the greenback’s strength against a basket of six major currencies, was little changed at 92.64 as of 11:30 a.m. ET, after touching a high of 92.86 earlier in the session. The index has been trading below the 93 level since last week, when the disappointing U.S. jobs report for August dampened the expectations of an early tapering by the Federal Reserve.

Some analysts said that the lower-than-expected headline inflation could ease some of the pressure on the Fed to start reducing its bond purchases soon, while others argued that the core inflation remained elevated and the supply-side constraints could persist for longer.

“The CPI report does not change our view that inflation will remain sticky and keep the Fed on track to announce tapering in November and start reducing asset purchases in December,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.

Dollar Pairs Show Mixed Reactions

The dollar’s performance against other major currencies was mixed after the inflation data. The euro gained 0.2% to trade at $1.1826, recovering from a two-week low of $1.1772 on Tuesday. The British pound also rose 0.2% to $1.3819, after falling to a one-month low of $1.3737 earlier in the day.

The dollar fell 0.3% against the Japanese yen to 109.64, extending its losses from Tuesday when it dropped to a two-week low of 109.56. The yen was supported by the safe-haven demand amid the uncertainty over the global economic recovery and the geopolitical tensions.

However, the dollar gained 0.4% against the Canadian dollar to 1.2696, as the loonie was weighed down by the lower oil prices and the weaker-than-expected Canadian manufacturing sales data for July.

The dollar also rose 0.3% against the Australian dollar to 0.7325, as the Aussie was hurt by the dovish comments from the Reserve Bank of Australia (RBA) Governor Philip Lowe, who said that the central bank would not raise interest rates until inflation is sustainably within the 2-3% target range.

Dollar Volatility Could Increase Ahead of Fed Meeting

The market participants are now looking ahead to the next Fed meeting on September 21-22, where they hope to get more clarity on the central bank’s plans for tapering and interest rate hikes.

Some Fed officials have expressed their support for starting to reduce the monthly bond purchases of $120 billion this year, while others have cautioned against rushing to withdraw the stimulus amid the Delta variant outbreak and other risks.

The Fed Chair Jerome Powell has said that he expects inflation to moderate in the coming months as the transitory factors fade, but he has also acknowledged that there is some uncertainty about how long it will take for that to happen.

The dollar volatility could increase as the market tries to gauge the Fed’s stance and timing on tapering and tightening based on the incoming economic data and speeches from Fed officials.

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