US Dollar: Crude rally and CPI risks shape path – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes that Brent Oil’s surge toward $100 is pressuring stocks and bonds while giving the Dollar a modest lift. However, he stresses that Friday’s US August Consumer Price Index (CPI) will be decisive for the Federal Reserve’s September 16 meeting. A stronger print would favor a hike and support the Dollar, while a softer reading could trigger a dovish repricing and Dollar weakness.

Oil strength and CPI steer Dollar

"Brent crude oil prices are up and within a whisker of $100 a barrel. Iran-backed Houthi militants reportedly targeted Saudi oil facilities on Monday and Tuesday. The rally in crude is weighing on stocks and bonds, while giving USD a modest lift."

"Nonetheless, Friday’s US August CPI report remains the main near-term market driver that will decide the Fed’s September 16 rate decision. A hot CPI print would all but seal a September hike and underpin a firmer USD. A cooler reading would strengthen the case for a hold and leave USD vulnerable to a dovish Fed repricing."

"More importantly, even if a September Fed hike becomes a done deal, we doubt USD will make new cyclical highs. Tightening by other major central banks limits policy divergence, with the ECB widely expected to deliver a 25bps hike on Thursday."

"August New York Fed consumer expectations survey is due later today (4:00pm London, 11:00am New York). Long-term inflation expectations are critical to watch for confirmation that long-term inflation expectations remain anchored."