Inflation-Driven Rate Hike Odds Rise Amid Rising Dollar Risk Premium
The latest US inflation data has pushed market expectations towards a near-certain Federal Reserve rate hike this week, and higher odds of another increase by year-end. According to Commerzbank's Thu Lan Nguyen, core US inflation rose more strongly than expected in August, increasing the likelihood of a rate hike at the upcoming meeting.
The initial reaction was as expected, with the US dollar appreciating following the release. However, the move quickly lost momentum, and EUR/USD even traded above its pre-release level before ending the day where it started.
Nguyen notes that the Fed's independence could be at risk if sustained political pressure from the White House continues to mount. If this trend persists, the positive impact of higher US policy rates on the dollar may become diluted.