The dollar index (DXY00) on Friday rose by +0.06%. The dollar found support as a hawkish US CPI report pushed odds of an FOMC rate hike next week up to 88% from 75% on Thursday. Also, the 10-year T-note yield on Friday rose by +0.6 bp, supporting the dollar’s interest rate differentials.
Friday’s -2.4% decline in oil prices initially caused the 10-year T-note yield to drop, despite the CPI report. However, the CPI report caught up with the T-note market by the end of the day, and the 10-year T-note yield ended slightly higher.
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Friday’s Aug US CPI report of +0.4% m/m was in line with market expectations, but the core CPI report of +0.3% m/m was slightly stronger than market expectations of +0.2% m/m. On a year-on-year basis, the Aug CPI report of +3.4% y/y was unchanged from July and was in line with market expectations. Meanwhile, the Aug core CPI report of +2.4% y/y eased slightly from July’s +2.5% and posted a new 5.5-year low, and was in line with market expectations.
Friday’s CPI report caused the markets to raise the odds for a +25 bp FOMC rate hike at next week’s meeting on September 15-16 to 88% from 75% on Thursday.
The dollar was undercut by Friday’s weaker-than-expected US consumer sentiment report. The University of Michigan’s preliminary Sep US consumer sentiment index fell by -3.9 points to 47.8, weaker than market expectations for a -0.6 point decline to 51.3.
Oct WTI crude oil prices (CLV26) fell -2.4% on Friday, giving back part of Thursday’s +6.7% surge to a 3.5-month high. Oil prices still rose by a net +9.4% on the week, but fell back on Friday after the International Energy Agency warned that high oil prices and restricted oil supply will cause the biggest drop in global oil demand this year since the Covid-19 pandemic.
EUR/USD (^EURUSD) fell by -0.14% on Friday, pressured by the stronger dollar. The euro was undercut during the week by a net +9% rally in oil prices, a negative factor for the Eurozone economy, which is heavily dependent on imported oil. The euro had underlying support from the ECB’s interest rate hike on Thursday, which helped the euro’s interest rate differentials. The ECB also raised its 2026 Eurozone GDP forecast, a positive factor for the euro.
The markets are discounting a 78% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29. The ECB, as expected, raised the deposit facility rate by +25 bp to 2.50% on Thursday and said inflation will stay above 2% for an “extended period.”
