Inflation remains a problem in the US, challenging the narrative that had been creeping in of the Federal Reserve being able to relax, and hence USD having reached a peak. Instead, the market is back to wondering whether 3.75%-4% by year-end will really be enough, or whether the Fed might have to keep going next year. And, of course, 75bp this month is now a done deal, if it hadn't been already. And instead of taking profit on USD longs, macro might now have to add to them anew.
USD moves higher in a knee-jerk reaction to a high US August inflation print across the board following a lot of paring back of saturated USD longs in the past couple of sessions. This print pretty much solidifies a 75bp hike interest rate rise by the Federal Reserve at its next monetary policy meeting in late September.
Terminal rates are up to 4.20% by March of 2023 and I think Tuesdays data should shift the narrative further away from the potential for cuts next year. It seems the 'higher-for-longer way of thinking the market got into after Jackson Hole is going to be the one to follow as inflation remains stubbornly high.
-UBS Strategy
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