**Forex Market Update: US Dollar Rises as CPI Data Strengthens Rate Hike Expectations**
*Original article credit: Mitrade News Team (Source: https://www.mitrade.com/insights/news/live-news/article-1-1111292-20250910)*
The US dollar (USD) continues its upward trajectory as recent inflation data renews expectations that the Federal Reserve could maintain higher interest rates for longer than previously anticipated. On the back of the latest Consumer Price Index (CPI) figures, traders are recalibrating their forecasts, resulting in notable currency market movements. Enhanced investor confidence in a resilient US economy is driving strength in the dollar across major forex pairs.
Here is an in-depth breakdown of current market movements and implications for traders:
US Consumer Price Index Data Recap
The pivotal driver of the most recent USD price action has been the release of the monthly CPI figures, which came in stronger than expected.
Key takeaways from the data include:
– The headline CPI rose 0.6% month-over-month in August
– Annual inflation accelerated to 3.7%, up from 3.2% in July
– Core inflation, which strips out volatile food and energy prices, increased by 0.3% on a monthly basis
– The annual core CPI fell slightly to 4.3% from 4.7%
These figures beat economists’ forecasts, particularly the monthly core inflation, which signaled underlying price pressures remain high. Energy prices, particularly gasoline, were a major cause of the month-over-month uptick, but food prices also contributed.
Federal Reserve Implications
The higher-than-expected inflation data has significantly impacted rate expectations. While the Federal Reserve is widely seen keeping rates steady at its upcoming meeting, the likelihood of at least one more hike before the end of the year has increased.
Market reactions and policy implications:
– Traders now price in around a 40% chance of another 25 bps rate hike by December, up from 30% before the CPI release
– Bond yields rose, with the 10-year US Treasury yield touching a multi-week high
– Fed officials maintain a cautious tone, emphasizing data-dependence in upcoming decisions
– Some analysts suspect the Fed may hold off at the September meeting but leave the door open for a hike in November or December
The sustained elevation of core inflation, combined with strong labor market data, lends support to the higher-for-longer narrative on interest rates. This stance is generally supportive for the dollar since it keeps returns on US assets attractive to foreign investors.
US Dollar Strengthens Across the Board
With inflation data reinforcing a hawkish bias, the US dollar gained ground across a range of major and minor currency pairs. The Dollar Index (DXY), which measures USD against a basket of six major currencies, climbed above 104.80, marking its highest level in recent weeks.
Major currency pair reactions:
– EUR/USD: Fell below 1.0700, pressured by diverging interest rate expectations and growing economic divergences between the US and eurozone
– GBP/USD: Dropped near 1.2450, as soft UK economic data and cautious Bank of England outlook made the pound less appealing
– USD/JPY: Advanced toward 147.50, spurred by widening US-Japan interest rate differential and dovish stance by the Bank of Japan
– AUD/USD: Slipped under 0.6400, amid risk-off sentiment and declining commodity prices
Overall, the dollar’s appeal remains strong as long as US economic fundamentals show resilience and the Fed maintains its tightening path.
Euro Weakens Amid Stagnant Eurozone Economy
The euro came under pressure as data pointed to stagnation within the eurozone economy. Despite marginal positive indicators, the overarching trend suggests limited room for the European Central Bank (ECB) to continue tightening policy.
Factors contributing to euro weakness:
– Industrial production growth remains sluggish
– Germany, the bloc
Explore this further here: USD/JPY trading.