US Dollar: CPI outcome to steer Fed path – BBH | FXStreet

The US Dollar slipped as the Japanese Yen rallied on shifting Bank of Japan expectations, before clawing back some losses after a strong August US payrolls report revived prospects of a Federal Reserve rate hike in September. With the next policy step finely balanced, this week’s US inflation data—Consumer Price Index (CPI) and Producer Price Index (PPI)—will likely set the tone for the Dollar and broader risk assets.

Key drivers and where we stand

Last week’s broad Yen strength pressured the Dollar as markets briefly repriced a more hawkish BoJ stance. By Friday, a solid nonfarm payrolls print helped the Dollar rebound, lifting odds that the Fed could raise rates at its September 16 meeting. Still, earlier commentary from US policymakers underscored progress on inflation, tempering the most aggressive hike bets.

Why CPI is pivotal

Friday’s August CPI report is the critical swing factor. A hotter-than-expected reading would likely cement a September hike and lend the Dollar additional support. Conversely, a softer print could see markets pare tightening expectations and weigh on the greenback in the near term.

Beyond the binary headline takeaway, the composition of inflation matters. Sticky services components—especially core services excluding housing—will be closely watched as a gauge of underlying price pressures. Shelter disinflation has been gradual, and any re-acceleration there would add to upside risks.

Why new USD highs aren’t guaranteed

Even if a September hike materializes, the Dollar may not easily break to fresh cyclical highs. Other major central banks are also tightening, limiting interest-rate differentials that had previously powered the Dollar’s outperformance. The European Central Bank, for instance, is widely expected to deliver another 25 bp increase, constraining policy divergence.

Balanced risks point to elevated volatility

Inflation risks look two-sided into the data. The recent uptick in the ISM Prices Paid index suggests pipeline pressures haven’t fully faded, arguing for caution on the upside. On the other hand, the continued deceleration in average hourly earnings in August reinforces the disinflation narrative and could offset some of those concerns. With positioning sensitive and liquidity thinner around data releases, an outsized market reaction is possible either way.

PPI as the warm-up act

Thursday’s PPI will set the stage for CPI. Particular attention will fall on PPI Services excluding Trade, Transportation, and Warehousing, given its partial pass-through into the policy-relevant Personal Consumption Expenditures (PCE) price index. Recent distortions from portfolio management fees could again influence the PPI print, though a scheduled methodology update later this month is expected to reduce such noise.

What to watch next

• CPI headline and core: Headline energy dynamics versus stickier core services.
• Wage and shelter trends: Further cooling in pay growth and continued moderation in shelter would bolster the disinflation case.
• PPI services details: Signals for upcoming PCE readings and potential fee-related distortions.
• Central bank signaling: Any guidance that reframes how long rates remain restrictive.

Bottom line

The Dollar’s next leg hinges on inflation data. A firm CPI would likely lock in a September hike and keep the USD bid, while a softer report could unwind tightening bets and pressure the currency. With global central banks still in tightening mode, any upside in the Dollar may be more measured than in prior cycles. Expect choppy, headline-driven trading as markets navigate finely balanced risks.