Volatility Looms as Fed Decision Nears Amid Divided Market Positioning

Commerzbank's Thu Lan Nguyen notes that the recent US labor market report does not significantly alter expectations for a September Fed rate hike, leaving August's US inflation as the key driver. Market pricing of roughly a 60% probability for a hike suggests divided positioning.

The dollar's post-payrolls rally proved short-lived, according to Commerzbank. As argued last week, this week's US inflation data for August will be crucial in determining the Fed's upcoming policy decision.

Markets are currently pricing in a 60% probability of a rate hike, with an upside inflation surprise likely increasing expectations further and supporting the US dollar. Conversely, weaker-than-expected inflation would have the opposite effect, potentially leading to pronounced volatility on the day of the Fed meeting.