It was a weak session in Asia as higher oil prices and UST yields sapped investors’ enthusiasm for risk. UST yields were pushed higher by concerns about US inflation ahead of the August CPI release later today. Indeed, a 10Y UST auction drew its highest yield since 2007.

Asian technology shares were also hurt by a weak investor reception of Apple’s launch of its iPhone 15. At the time of writing, most Asian bourses as well as S&P 500 futures were trading in the red. Higher UST yields and risk-off trading led to a modestly stronger USD with the AUD and JPY leading the declines against the USD. G10 FX is trading cautiously and in tight ranges ahead of the US inflation data release later today.

USD: of (headline) inflation and head fakes

Ahead of the US CPI data, our US economist is looking for the headline print to reaccelerate to 3.7% YoY in August, up from 3.2% previously (and above the consensus expectation of 3.6%). In contrast, core inflation is expected to slow down to 4.2% YoY in August, down from 4.7% in July. The mix of accelerating headline and decelerating core inflation highlights that the main driver of the latest price developments is the renewed rebound of energy prices.

Fed Chair Jerome Powell signalled back in July that the August CPI is the final of the five key data points that will inform the outcome of next week’s policy meeting. In that, we believe that the Fed may decide to look past the revival of cost-push inflation and focus instead on the persistent drop of core inflation.

If confirmed, today’s data could therefore confirm market expectations of a Fed pause in September.

Turning to the FX market reaction, the USD will likely take its cue from the US rates markets. We further note that while today’s CPI print may not reignite the Fed rate hike expectations, it could still encourage investors to push back on their rate cut expectations and thus boost the USD rate appeal especially if the (headline) inflation print overshoots market expectations.

In addition, the safe-haven USD could continue to draw support from the market’s fragile risk sentiment.