The US Dollar initially strengthened following the release of the US Consumer Price Index (CPI) data for August, which showed a 3.4% year-over-year increase, unchanged from the previous month and in line with market expectations, according to the Bureau of Labor Statistics (BLS) [1][2]. On a monthly basis, CPI rose 0.4%, up from 0.1% previously [1][2]. Core CPI, which excludes food and energy, increased 0.3% month-over-month, exceeding the 0.2% forecast, but eased to 2.4% annually from 2.5% in July [1][2]. This firmer monthly core inflation initially supported the US Dollar, but the reaction was short-lived as the annual figures showed no renewed acceleration in inflationary pressures [1][2].
In currency markets, the Japanese Yen strengthened notably, with USD/JPY falling 0.54% to around 153.60 after initially jumping to 154.49 post-CPI release [1]. The Yen's strength was attributed to expectations surrounding the Bank of Japan's upcoming monetary policy decision, with markets anticipating a potential 25-basis-point rate hike to 1.25%, which would mark the highest borrowing costs in 31 years [1]. This potential tightening, combined with the US Dollar's fading momentum, kept USD/JPY under pressure [1].
Meanwhile, the Canadian Dollar underperformed its peers, as USD/CAD rose 0.27% to around 1.3870, reaching a daily high of 1.3882 after the CPI release [2]. The Loonie's weakness was exacerbated by a sharp decline in Oil prices, with West Texas Intermediate (WTI) falling 4.62% to $95.90, after facing strong selling pressure above $100 [2]. Lower Oil prices, a key export for Canada, weighed on the currency, allowing USD/CAD to extend its advance [2]. Technical analysis indicated USD/CAD retained a bullish near-term bias, with the Relative Strength Index (RSI) at 76.9 in overbought territory, suggesting strong upside momentum but also a risk of corrective pause [2].
US consumer sentiment also deteriorated, with the University of Michigan Consumer Sentiment Index dropping to 47.8 in September from 51.7 in August, missing economists’ expectations of 51.0 [3]. The Current Conditions index fell to 50.9 from 51.9, and the Expectations gauge declined to 45.8 from 51.5, indicating a downbeat outlook [3]. Inflation expectations rose, with the one-year outlook at 4.6% (up from 4.0%) and the five-year forecast at 3.4% (up from 3.3%) [3]. The US Dollar Index (DXY) faded its post-CPI gains and hovered around the 99.00 region, reflecting the weaker sentiment and fully erasing the earlier bull run [3].
CONCLUSION
The US Dollar's initial strength following firmer core inflation data was quickly reversed as consumer sentiment weakened and the Japanese Yen gained on expectations of tighter monetary policy. The Canadian Dollar suffered from falling Oil prices, further supporting USD/CAD's advance. Overall, market sentiment turned negative for the US Dollar, with the DXY erasing its post-CPI gains amid deteriorating consumer confidence and rising inflation expectations.