USD Volatility Risks Loom Large Ahead of Fed Decision

The latest US labour market report has not changed expectations for a September Federal Reserve rate move, according to Commerzbank's Thu Lan Nguyen. She notes that the strong employment numbers do not make a rate hike significantly more likely, but also do not stand in its way.

Nguyen emphasizes that the key driver of the Fed's decision will be the upcoming August US inflation data. Market pricing currently suggests a 60% probability of a rate hike, leaving room for significant USD volatility around the Fed meeting depending on how inflation prints relative to forecasts.

If the inflation figures come in broadly in line with analysts' expectations, markets are likely to maintain their current assessment until the Fed meeting. However, an upside inflation surprise would increase expectations of a rate hike further and support the US dollar, while weaker-than-expected inflation would have the opposite effect.