US dollar grinds higher as CPI reinforces Fed hawkishness

The dollar is ending another volatile week in FX markets a touch higher against most major currencies. The market reaction to the upside surprise in September’s US CPI data (released yesterday) was perplexing, with US yields and the dollar initially surging, before dropping back sharply. But they have rallied again today after solid US retail sales data and a worrying reversal in survey-based inflation expectations. In other words, the apparent hope among investors that yesterday’s CPI print might bring about the moment of “peak hawkishness” in rate expectations appears to have been dashed again. That said, we continue to think that disinflationary pressures in the US economy are widening, and that the FOMC’s tightening cycle will come to an end in the next few months. Even so, the FOMC looks set to remain aggressive in the near term, pointing to further upward pressure on the greenback. And we expect the deteriorating economic outlook and “safe-haven” demand to underpin continued dollar strength even after the Fed shifts tack next year.