Dollar gains as US PPI data bolster Fed hike bets

US PPI data strengthens September Fed hike case

The US dollar gained against all its major peers on Thursday, corroborating the notion that traders may have been saving ammunition for the US inflation numbers.

Yesterday, the producer price data for August were released, revealing that the headline PPI rate jumped to 5.4% year-on-year from an upwardly revised 4.8%, while the core rate rose to 4.6% y/y from 4.3%.

In the midst of heightened hostilities in the Middle East, the data bolstered Fed hike expectations, taking the probability of a 25bps increase at next week’s gathering up to 68%. A second same-sized hike was brought forward from March to January.

Spotlight turns to US CPI inflation

Now, the fucus shifts to today’s US CPI report for the same month. Should the data reveal that the increased prices producers paid were passed on to consumers, the implied path could further steepen, especially after the rally in oil prices accelerated to above $100 per barrel, raising fears about even hotter inflation in the months to come.

Considering all this and taking into account that Treasury yields further rose yesterday, despite the US Treasury’s buyback operation, the dollar may be poised to gain more ground should the CPI numbers also exceed analysts’ consensus estimates.

It is worth noting that the headline rate is expected to have held steady at 3.4% y/y and the core one to have ticked down to 2.4% y/y from 2.5%. Therefore, judging by yesterday’s PPI figures, the bar for beating those forecasts may be relatively low.

ECB raises interest rates, signals more to come

Besides the US PPI report, investors also had to digest the ECB decision yesterday. The ECB raised its interest rates by 25bps as was widely anticipated, citing growing concerns that inflation will remain elevated for longer amid heightened tensions in the Middle East.

The Bank upgraded its inflation projections, with President Lagarde ringing the alarm bell about secondary effects on other prices and wages should the war intensify further. A Bloomberg article cited people familiar with the situation, saying that officials are expected to raise interest rates again, with another hike possible as soon as next month.

This prompted investors to assign a 65% chance of a back-to-back increase in October, with a hike being more than fully priced in for December. That said, the hawkish pricing was unable to help the euro much, as the US dollar flexed its own muscles after the US PPI data.

Stocks extend slide, gold pulls back amid rising yields, strong dollar

On Wall Street, all three of its main indices extended their declines as rising bond yields, a stronger dollar, and increased Fed hike bets, coupled with surging oil prices, further deepened risk aversion. The selloff came despite the renewed optimism about AI-related investment and spending, suggesting that stocks will remain highly sensitive to today’s CPI numbers.

Gold slid after hitting resistance at the $4,435 barrier. Although the decline stopped today near the 200-day exponential moving average (EMA) and the metal rebounded somewhat, hotter-than-expected CPI inflation prints today could resume the slide and perhaps give the bears the green light to slowly drift toward the $4,200 territory.