September Fed meeting: expected hawkish rhetoric may support the U.S. dollar

• According to the latest labour report, the unemployment rate rose sharply from 3.5% to 3.8%. The Fed is expected to hold the key rate hike at next week’s FOMC meeting.
• Due to the mixed August inflation report, the Fed will likely have to take a hawkish tone in its messaging.
• The U.S. dollar will likely rise significantly due to the expected hawkish tone—USDJPY could rise to the 148.50–149.00 range.

KUALA LUMPUR, MALAYSIA – Media OutReach – 18 September 2023 – The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve will meet on 19 – 20 September to decide on changes to monetary policy. Market expectations indicate that the Fed will likely announce a pause, keeping the rate at 5.25%–5.5%, nearing a 22-year-high.

During the previous FOMC meeting in July, the Federal Reserve raised the key rate again after one break of 25 bps and now stands at 5.25%–5.5%. The Fed’s policy of raising rates aims at maximising employment and reducing and then holding inflation at 2%.

According to the latest report from the U.S. Bureau of Labor Statistics released on 1 September 2023, the unemployment rate unexpectedly jumped to 3.8 % in August from 3.5% in July. The rising unemployment rate will add to expectations that the Federal Reserve will slow or pause rate hikes.

Fresh inflation data released by the U.S. Bureau of Labour Statistics on 13 September 2023 reported that the U.S. consumer inflation rate increased sharply in August by 0.63% from 0.17% in July, and the annual inflation rate accelerated in August to 3.7% from 3.2% in July. Core CPI, which excludes food and energy, fell to 4.35% in August, down from 4.65% a month earlier and matched the consensus.

‘According to the latest labour report, the Fed is widely expected to hold the key rate hiking at next week’s FOMC meeting,’ said Kar Yong Ang, the OctaFX financial market analyst. ‘But due to August’s mixed inflation data report, the Fed must keep a hawkish tone in its messaging. The core CPI is still too high and could accelerate,’ he added.

The key rate will likely remain unchanged at the September meeting of the U.S. Fed. Still, the accompanying rhetoric could be quite tough, signalling further possible monetary policy tightening. This will hurt capital markets, favouring the strengthening of the U.S. dollar. For example, this could impact currency pairs with the dollar, potentially leading to a rise in USDJPY to the 148.50–149.00 range.

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