FX.co ★ Dollar Edged Down Last Week Amidst Softer CPI

The week ending September 13 saw the U.S. Dollar experience a slight decline against major currencies, influenced by lower-than-expected CPI figures from the United States. While the greenback appreciated against the euro, British pound, Canadian dollar, and Swiss franc, it was unable to surpass the strength of the Japanese yen and Swedish krona.

The Dollar Index, which gauges the U.S. Dollar's performance against a basket of six currencies, dipped 0.07% over the week, falling to 101.11 from 101.18. The Index exhibited a broad trading range, peaking at 101.84 on Thursday before dropping to a low of 100.88 on Friday. According to data from the U.S. Bureau of Labor Statistics released on Wednesday, annual headline inflation in the U.S. fell to 2.5% in August, down from 2.9% in July. This marked the fifth consecutive month of declining inflation, levels not seen since February 2021. Market expectations had forecast a CPI reading of 2.6%. Meanwhile, the core inflation component, excluding volatile energy and food prices, remained steady at a three-year low of 3.2%, matching expectations.

Monthly headline inflation held steady at 0.2% as predicted, but the core component unexpectedly rose to 0.3% instead of holding at the anticipated 0.2%.

On Thursday, data from the U.S. Bureau of Labor Statistics indicated a 0.2% month-on-month increase in factory gate prices in August, exceeding the revised flat reading from July and surpassing the forecast of 0.1%.

According to the U.S. Department of Labor's report also released on Thursday, jobless claims increased by 2,000 to 230,000 during the week ending September 7, aligning with market expectations.

Following mixed CPI readings, an uptick in producer price inflation, and a rise in initial jobless claims, interest rate traders found themselves in a state of uncertainty. As of Friday, the CME FedWatch tool reflected an evenly split probability of 50% for both a 25-basis point and a 50-basis point rate cut in September.

The euro edged down 0.06% against the dollar during the week, coinciding with a 25-basis point rate cut by the European Central Bank. The EUR/USD pair closed at 1.1076 on September 13, down from 1.1083 the prior week. The pair hit a weekly low of 1.1002 on Wednesday and a high of 1.1102 on Friday. A lack of clear guidance from the ECB on another rate cut in October helped limit the euro's losses.

The British pound weakened slightly by 0.01% against the dollar ahead of the Bank of England's interest rate review, with uncertainty looming over a potential rate cut. The GBP/USD pair fell slightly from 1.3123 on September 6 to 1.3122 by September 13, trading between a low of 1.3001 on Wednesday and a high of 1.3159 on Friday.

The Japanese yen strengthened significantly against the dollar during the week amid indications that the Bank of Japan was prepared to raise rates further. The USD/JPY pair dropped to 140.82 from 142.27 a week earlier, fluctuating between a high of 143.81 on Monday and a low of 140.28 on Friday. Markets are adjusting to the possibility that the Bank of Japan will not let market volatility derail its rate-hike plans aimed at tackling inflation.

In contrast, a hawkish Reserve Bank of Australia bolstered the AUD/USD pair, which climbed nearly half a percent during the week. The divergence in monetary policy outlooks between the RBA's hawkish stance and the Federal Reserve's dovish pivot pushed the pair to 0.6703 from 0.6670 a week earlier, trading between 0.6622 on Wednesday and 0.6734 on Friday.

As markets anticipate the Federal Reserve's interest rate decision on Wednesday, sentiment remains jittery. The CME Group's FedWatch Tool now shows a 63% chance of a 50-basis point cut and a 37% likelihood of a 25-basis point reduction. The Dollar Index has slipped to 100.69 from Friday's close of 101.11, as markets brace for a potentially larger rate cut.

The EUR/USD pair has rallied to 1.1131 from Friday's 1.1076 close. The GBP/USD pair stands at 1.3209, surging from 1.3122 the previous week. The USD/JPY pair is at 140.38, lower than Friday’s close of 140.82, and markets keenly await Thursday's inflation update and the Bank of Japan's rate decision on Friday. The AUD/USD pair has also strengthened to 0.6744 from 0.6703 on September 13.