US Dollar Index CPI: DXY Holds Above 102.00, MUFG Says

The US dollar index held just above 102.00, close to year-to-date levels, according to MUFG, with the September US CPI report due on Wednesday. The US dollar index CPI test matters to FX traders because it shapes whether the Fed pauses this month.

Key Takeaways

Dollar steady: The dollar index is trading just above 102.00, near its year-to-date levels.
Softer data: The August PCE deflator and September NFP reports were softer, which reduced expectations of a Fed hike this month.
Pause, not an end: MUFG says the Fed currently plans to hike again in December.

What Happened

Lee Hardman of MUFG said major currency rates were stable overnight. The dollar index continued to trade close to its year-to-date levels, he wrote in a research note.

The note links the softer tone to two US releases: the August PCE deflator and the September non-farm payrolls report. The source gives no figures for either report.

MUFG expects a hold at this month's meeting. "Unless there is a significant upside surprise for underlying inflation, we expect the Fed to leave rates on hold this month," the note said.

The bank described the pause as likely temporary. It said the Fed still plans another hike before the end of the year, in December.

Background

Markets now price only modest tightening this month, down from earlier expectations of a hike. Comments from Fed leadership cautioned against another back-to-back increase.

US bond yields have also pulled back from multi-year highs, according to the AUD/USD note in the same report.

Market Impact

USD/JPY: The pair traded above 158.00 at the start of the week amid speculation about intervention by Japanese authorities. The source gives no details on size or timing.
AUD/USD: The pair fell below 0.7000 after a modest bearish gap in the Asian session on Monday. Trade was thin because of a holiday.
Gold: Prices slid to a fresh daily low near $4,170 in the early European session.
USD/INR: The pair was near 95.80, clinging to recovery gains after opening significantly higher. The RBI introduced fresh measures to curb US dollar demand, which supported the rupee.

What to Watch Next

September US CPI report: Due Wednesday, it is the key test of MUFG's view that the Fed holds this month.
Fed Chair Kevin Warsh's comments: Fed communication has been cautious, and the pause call rests on it.
RBA decision in November: Odds of another RBA hike have diminished, which bears on AUD/USD.

Bottom Line

MUFG expects the Fed to hold this month unless inflation surprises, with a hike still planned for December. For dollar index traders, the September CPI report is the data point that tests that view.

US Dollar Index Holds Above 102.00 Before CPI, Says MUFG