USD Rallies on Hawkish Fed Comments Despite Weak Data

The US dollar (USD) index pulled away from its three-month high on Tuesday after weak data releases, but still closed in positive territory due to hawkish comments from Fed officials. The market volatility may heighten in the second half of the day as the US economic calendar features key data releases.

Austan Goolsbee, Chicago Fed President, delivered a notably hawkish message late Tuesday, warning that expectations of future AI-driven productivity gains create a 'high danger of overheating now.' He emphasized the need for clear evidence that inflation is coming back down and highlighted supply-side constraints such as refinery capacity.

Strategists at OCBC maintain their base case for a moderate USD rally into year-end, but caution that current market expectations for the Fed may be running ahead of fundamentals. They note that markets are pricing almost four Fed rate hikes over the next year, which appears overly aggressive unless demand-driven inflation re-emerges as the dominant force behind price pressures.

The data from Australia showed annual inflation climbing to 4% in August from 3.5% in July, matching market expectations. The AUD/USD struggled to stage a rebound and traded below 0.7000 after closing in the red on Tuesday.