Dollar Strength Hinges on Upcoming CPI Amid Fed Tightening Fears

The US Dollar (USD) received an initial boost from stronger-than-expected jobs data in the recent payrolls report. However, as Christopher Wong of OCBC notes, the softer wage growth and only modest repricing by the Federal Reserve (Fed) capped gains for the USD.

The resilient US labour market keeps the risk of further Fed tightening alive, which may restrain USD downside before this week's Consumer Price Index (CPI) is released. Wong argues that while stronger jobs data reinforces the resilience of the US economy and justifies keeping the risk of Fed tightening alive, markets require firmer inflation evidence to price a September hike with greater conviction.

This partially explains the muted USD follow-through after the payrolls report, as implied probability of a September hike briefly rose to around 65% from 55% but subsequently eased towards 62%. The focus now shifts to this week's CPI release, where an upside surprise could provide a catalyst for renewed USD strength.