September FOMC preview: Powell stays the course to fight inflation

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The Fed is expected to raise rates by 75bps points at this week’s meeting, following the latest rise in US inflation.

Source: Bloomberg

 Chris Beauchamp | Chief Market Analyst, London | Publication date: Tuesday 20 September 2022 

75bps still expected for Wednesday’s meeting

After the latest US inflation reading, markets are once again on notice for a sharp rise in US interest rates.

The Federal Reserve's (Fed) push to bring inflation under control continues, and while the consumer price inflation (CPI) indicator is not their favoured measure, the latest figure shows that price increases are continuing at a rapid pace in the US.

Indeed, while food and fuel prices have eased a touch, lessening the rate of increase in overall inflation, core CPI (which excludes food and energy) has continued to rise sharply. This shows that inflation is becoming more entrenched in the US economy, as businesses other than those connected with food and fuel supplies raise prices.

The Fed’s quest to bring inflation back within its 2% target range thus continues.

Dollar revives as markets price up rate rise

The dollar index has been in a steady rising trend for over a year. The move higher had slowed of late, on expectations that the Fed might only raise rates by 50 basis points (bps). But with inflation still rising sharply, the market now expects the Fed to raise rates by 75bps, although current pricing suggests a 20% chance that the US central bank will go for a big 100bps move, increasing rates by a whole percentage point.

USD outlook – where does the dollar go from here?

2022 has been the year of the rising dollar, but there is little sign at present that this is about to reverse. Indeed, as noted above, the CPI reading and the expectations around the Fed move have given the trend a new lease of life.

For the dollar basket, the uptrend remains in place, and, barring an unexpectedly dovish commentary around this week’s meeting, will go back to the September highs above 110. From there, the 2001 highs at 120 are the next big level to watch.

Source: ProRealTime