Inflation rises again and keeps pressure on Fed
The inflation data released for August indicates a notable uptick in the main gauge favored by the Federal Reserve, leading to renewed discussions about interest rate policy. With the Fed's earlier rate hike, this increase in inflation further solidifies the notion that monetary tightening may not be finished. As the Fed balances inflation control against economic growth, the implications for the U.S. dollar could be significant, especially in light of potential future rate changes.
Where it sits in our coverage
Our consensus EUR/USD target sits at 1.075 (median across 8 firms), with Goldman at the upper bound (1.12) and BofA at the lower (1.04). Marketwatch's view aligns more closely with the upper third — JPMorgan and ING share that framing.
How firms align
JPMorgan supports the perspective coming from the inflation data, maintaining a target of 1.10, aligning with the possibility of further tightening from the Fed. Conversely, BofA adopts a more cautious stance, targeting 1.04, reflecting concerns over sustained inflationary pressure dampening growth forecasts. See more details in our internal reports on firms.
What the data shows
Recent sentiment from our forecasts suggests a heightened focus on inflation metrics, with potential revisions reflecting increased expectations for Fed action. Further insights can be found at /research/inflation-impact-fx.
How firms align with this view
Aligned with the headline view
Contrary positioning
Key takeaways
- 01August inflation data indicates rising pressure on the Fed.
- 02Expect continued volatility in the dollar as rate expectations shift.
- 03Upcoming FOMC meeting will be crucial for USD direction.
- 04Monitor economic indicators that may affect inflation outlook.
Market implications
Investors should closely watch the next Federal Open Market Committee meeting for signals on future rate changes, particularly if inflation continues to rise. Our consensus target of 1.075 for EUR/USD reflects this sensitive positioning in the market.
Risks to this view
A reversal in the current bullish sentiment towards the USD could be triggered by evidence of cooling inflation or labor market weakness. Additionally, any policy signals from the Fed indicating a pivot towards easing could significantly alter market expectations.
Sentiment by currency
USD+EUR JPY GBPComposite USD score: +0.65
Sources & References
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