Antje Praefcke at Commerzbank highlights that markets now price nearly a 70% chance of a September Fed hike after Chair Kevin Warsh’s hawkish speech, but stresses upcoming US inflation data will be decisive. She downplays the jobs report as a linchpin and questions how long the Dollar can benefit from a potential rate hike amid renewed political risks.

Dollar support may prove short-lived even if the Fed hikes

“Admittedly, expectations for a hike have risen significantly once again following Fed Chairman Kevin Warsh’s hawkish speech last Friday and now stand just shy of 70%. However, there are still important data releases on the horizon that could change the picture once again.”

“I’m referring less to Friday’s jobs report, which may surprise some. It certainly has the potential to move the dollar. But since Warsh assumes that full employment prevails, the jobs report is unlikely to be the linchpin in the decision on whether to raise the Fed funds rate in mid-September.”

“Much more important will be the August inflation figures, which will be released next Friday. After all, prices rose only moderately in July, which could justify the Fed standing pat. However, the inflation rate in August may have risen more sharply again due to the renewed increase in energy prices.”

“Will the August rate be high enough to convince more than the three FOMC members who voted for a hike at the last rate-setting meeting – and perhaps even Warsh himself – that a rate hike is now unavoidable? That is likely to be the big question. Which is why, in my view, any back-and-forth fluctuations in the dollar in the run-up to these figures Friday next week make little sense.”

“But even if next week’s inflation figures turn out to be surprisingly high, interest rate expectations receive another upward push, and the Fed does indeed raise rates in mid-September, I’m not sure whether the dollar can benefit from this for long. So far, there has been no comment from the White House on Warsh’s monetary policy, but that could change with an interest rate hike. The conflict with the president’s wishes could flare up again.”