USD: The tapering dilemma is still there, but how much does it matter for the dollar?
A slightly below-consensus read in US inflation yesterday saw an initial negative reaction in the dollar, which however quickly reversed. Jitters in the stock market later in the day helped the dollar recover further, but it also appeared clear that the CPI read itself was not enough to trigger a break from the recent tight ranges in major dollar crosses.
Eventually, inflation numbers provided no answers to the market’s dilemma around the timing of Fed tapering. The quick reverse in dollar weakness, however, could suggest that some short delay in the tapering announcement (i.e. in November instead of September) may not be enough to generate a sustained dollar downtrend. After all, the dollar has recently received support from the narrative of a potential combination of monetary tightening and slowing growth in the medium term: it is no surprise that a marginal decrease in inflation did very little to ease such concerns.
Having digested the latest key piece of hard data before next week’s FOMC meeting, the upcoming releases seem unlikely to drive any meaningful change in rate expectations, and by extension, the dollar. Still, the September Empire Manufacturing index as well as August’s industrial production numbers will provide some extra measures about the impact of supply-chain disruptions today.
A likely quiet rest of the week for markets may fail to revive volatility in major USD crosses, and we expect a prevalence of range-bound trading. If anything, the risks for the dollar heading into next week’s Fed meeting may be slightly tilted to the downside if markets cement their view that the tapering announcement will indeed be delayed and high-beta currencies may see room for some recovery after a possible overreaction to the move lower in US equities (and also on the back of that same view on tapering delay). But, as mentioned above, a sustained downward trend lasting multiple weeks in the dollar does not seem likely.