USD Gains Capped by Soft Wage Growth Ahead of Crucial CPI Announcement

The US Dollar (USD) received initial support from stronger-than-expected jobs data, but its gains were capped due to softer wage growth and only modest Federal Reserve repricing. According to OCBC's Christopher Wong, the resilient US labour market keeps the risk of further Fed tightening alive, which may limit USD downside before this week's Consumer Price Index (CPI) announcement.

The payrolls report reinforced the resilience of the US economy, but its impact on the Dollar was not sufficient to drive a sustained leg higher. Wong notes that wage pressures are still contained, and markets require firmer inflation evidence before pricing a September Fed hike with greater conviction.

This partially explains the relatively muted USD follow-through after the payrolls report. Fed hike expectations did increase, with the implied probability of a September hike briefly rising to around 65% from 55%, but subsequently eased towards 62%. Focus now shifts to this week's CPI announcement, which could provide the catalyst for renewed USD strength if there is an upside surprise.