US Dollar at Risk as Inflation Data Sets Stage for FOMC Meeting

Talking Points:

• US Dollar may weaken further if CPI data undershoots expectations
• Fed rate hike probability back below 50% after US Retail Sales data
• Yen briefly gains, then erases rally in otherwise quiet Asian session

Augusts’ US CPI report headlines the economic calendar in the final hours of the trading week. The core year-on-year inflation rate is expected to hold steady at 2.2 percent. A lower than expected print extending the recent string of disappointing outcomes on US data flow may prompt another downshift in the priced-in Fed rate hike outlook, sending the US Dollar downward.

The markets’ policy bets implied in Fed Funds futures took a dovish turn yesterday following a disappointing Retail Sales report, sending the greenback downward. Indeed, the probability of a rate hike before year-end has slipped below 50 percent anew having probed above 60 percent on the back of hawkish commentary from FOMC officials just last week.

A lull in high-profile event risk made for a quiet session overnight, with most major currencies confined to narrow ranges. The Yen narrowly outperformed early in the session as Japanese stocks gapped down at the session open, boosting offering support to the anti-risk currency. The advance was all but erased heading into European hours as shares recovered however.

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Asia Session

European Session

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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