How Inflation Would Affect The dollar And FED Descisions

author
Assem Mansour

Impact of U.S. Inflation Data on the Dollar and Federal Reserve Decisions

Yesterday, U.S. inflation data for August was released, drawing the attention of global markets due to its direct impact on the U.S. dollar and the Federal Reserve’s interest rate decisions. The data showed that the Consumer Price Index (CPI) rose by 2.5% year-on-year, in line with expectations, while core inflation, which excludes food and energy prices, increased by 0.3% on a monthly basis.

Impact of Inflation Data on the U.S. Dollar

The U.S. dollar saw volatility in the markets following the inflation data release, initially experiencing a strong rise as expectations grew that the Fed would not cut interest rates as aggressively as the markets had previously anticipated. Markets now expect the Fed to reduce interest rates by 0.25% instead of 0.50% at its meeting later this month, as high inflation supports the Fed’s cautious stance on keeping interest rates relatively elevated.

However, after the markets absorbed the data, the dollar continued to fluctuate as the Fed faces a dilemma between controlling inflation and ensuring stable economic growth.

Effect of Data on Federal Reserve Decisions

This data is expected to play a significant role in the Fed's upcoming meeting on September 18. The rise in monthly core inflation may prompt the Fed to maintain its high-interest rate policy for a longer period, avoiding rapid cuts. The Fed's target is to reach 2% inflation, and current data suggests that maintaining a steady pace towards this goal could be more challenging than expected.

On the other hand, the Fed may consider the slowdown in the U.S. economy and the risks associated with excessively high interest rates, which could harm growth and increase fears of a recession. As a result, a 0.75% rate cut is anticipated by the end of the year.

Technical Outlook for the Dollar Index

The U.S. dollar is expected to maintain its gains in the short term, as long as the index remains above the support level of 101.33. It may face strong resistance at 101.90, and if this level is breached, the dollar could continue to rise to 102.30.

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