USD at Crossroads as US CPI Report Looms Amid Normalized Market Pricing

The US dollar experienced a significant decline on Friday following the release of a softer than expected Non-Farm Payroll (NFP) report. The headline numbers revealed negative payroll growth, with average hourly earnings missing forecasts by a notable margin.

The data triggered a dovish repricing in interest rate expectations, causing the probability of a September rate hike to fall to 38%, down from 54% before the release. However, market pricing has since normalized, with the probability of a September hike rising back to 48%.

The reason for this whipsaw in expectations lies in the significant loss of government jobs, which made the report appear softer than it actually was. In contrast, the unemployment rate painted a more optimistic picture, falling further to 4.1%. The labour market remains on a better trajectory than it has been over the past three years.

The next major event will be the US Consumer Price Index (CPI) report on Wednesday, which will be critical for the September Federal Open Market Committee (FOMC) decision and the Jackson Hole Symposium. A hot report is likely to trigger a rally in the US dollar, with traders increasing rate hike bets. Conversely, a soft report should reduce further the risk of Fed tightening and put more pressure on the greenback.