US Dollar Gains as CPI Data Set to Confirm Fed Rate Hike

The US dollar strengthened as the bond market turmoil subsided. This move restored the positive link between the currency and long-term US Treasury yields. The shift reflects a broader rates narrative rather than an oil-driven reaction. High-beta currencies like the Australian dollar and New Zealand dollar fell against the greenback. Defensive assets such as the British pound and Swiss franc held their value better. The Treasury announced a buyback operation of $5.19 billion. This figure was lower than the initial $6 billion estimate. US Treasury Secretary Scott Bessent avoided aggressive intervention. This restraint was necessary to stabilize the correlation between the dollar and back-end yields.

Inflation Data Will Decide Fed Path

Markets have increased pricing for a Federal Reserve rate hike next week. The probability rose to an 18 basis point increase. This change followed an oil price rally and a small upward revision to July producer price data. August consumer price index figures are due today. Consensus expects core inflation to rise 0.2 percent month-on-month. Headline inflation is expected at 0.4 percent. ING’s macro team aligns with these projections. A marginal upside surprise in headline inflation would likely confirm a September hike. Core inflation remains benign, but the headline acceleration is sufficient to tilt policy. A downside surprise complicates the outlook. Fed Chair Kevin Warsh has set a high bar for data to overturn the hawkish stance. Christopher Waller suggested no hike is needed if inflation continues to improve. Oil prices have risen 15 percent since July. A soft CPI print may weigh on the dollar but might not push hike probability below 50 percent. That level could be enough to convince remaining FOMC members to act.

Hawkish ECB Limits Euro Downside

The European Central Bank delivered a hawkish rate decision. Inflation forecasts were revised higher for the 2028 horizon. Headline CPI is now projected at 2.1 percent. Core CPI is expected at 2.3 percent. These figures point to further tightening. ECB President Christine Lagarde’s comments reinforced this view. Officials expect more rate increases, with October as a firm target. This meeting clarified the short-term outlook for rates and FX. It allowed markets to maintain the link between oil prices and rate expectations. Pricing for the July ECB meeting jumped by roughly 25 basis points. It now stands at around 85 basis points. This hawkish stance reduces immediate downside risks for the euro. However, it trims conviction for a stronger dollar move toward 1.150. The balance of risks remains skewed toward higher oil prices. Stress in bond markets continues to affect risk assets. This combination favors a defensive rotation into the dollar. The DXY index at 100.0 is becoming a realistic destination.

Dollar Outlook Remains Constructive

The yen rally has stalled. It no longer exerts a negative spillover effect on the US dollar. Developments in the Gulf leave the balance of risks favoring higher oil prices. Bond market stress is increasingly bleeding into risk assets. This dynamic supports a defensive rotation back into the dollar. The short-term outlook for the greenback remains positive. The re-established correlation with long-end yields provides support. Today's CPI release is the critical catalyst. A confirmation of the hawkish narrative would solidify the dollar's strength. The market is positioned for a rate hike. The bar for data to change this view is high. The dollar's performance is decoupling from pure oil risk. It is now driven by rates and inflation expectations. This shift favors the US currency in the near term. The DXY level of 100.0 is within reach. The path forward depends on today's inflation numbers. The Fed is prepared to act if needed. The ECB is already tightening. The global rates environment is shifting in favor of the dollar.