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The release of the latest US inflation data has done little to impact near-term Fed rate pricing, despite coming in above forecasts. Annualized CPI was seen rising to 3.7% from the prior month’s 3.2% reading, above the 3.6% the market was looking for. Looking at the monthly breakdown, headline inflation rose 0.6% last month, its largest monthly increase since June 2022, up from 0.2% a month prior. Meanwhile, core inflation was seen rising to 0.3% up from 0.2% a month prior.
 

CPI Uncertainty & Fed Tightening Expectations

The data shows that inflation is certainly not trending back toward the target in a linear fashion. However, on the back of the recent uptick in energy prices, a stronger August inflation print had been expected. The Fed has also signaled its willingness to look past any short-term blip. The real challenge for the Fed will be whether September inflation is seen cooling again or if the rebound continues. If we see a second month of CPI gains, this might well put further Fed tightening back on the table before year-end. As such, USD looks likely to remain supported near-term with pricing for November and December hikes having jumped to around 40% on the back of the data.
 

Technical Views

DXY

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For now, the Dollar Index remains capped by the 104.95 level. This is a major resistance level for the index and a break higher here will be firmly bullish for USD causing a strong wave of reaction across FX markets. To the topside, a break higher will put focus on 105.57 initially. To the downside, any correction lower here will put focus on 103.48 next. 

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