The US Producer Price Index (PPI) rose sharply by 5.4% year-over-year in August, up from 4.8% in July, surpassing market expectations of 5.3% according to the Bureau of Labor Statistics (BLS) data released on Thursday [1][2][3]. On a monthly basis, headline PPI increased by 0.4%, matching consensus, while core PPI rose 0.2%, slightly below forecasts [1][2][3]. This hotter-than-expected inflation print has led traders to raise the odds of a quarter-percentage-point Federal Reserve rate hike to more than 73%, as tracked by the CME FedWatch tool [1]. The upcoming US Consumer Price Index (CPI) report, expected to show a 3.4% headline rise and 2.4% core increase for August, is seen as the final key input before the Fed's interest rate decision next week [1].
The US Dollar strengthened against several G10 currencies following the PPI release. The Australian Dollar (AUD/USD) softened to around 0.7155, with traders awaiting the CPI data for further cues [1]. Despite the USD's strength, a hawkish tone from the Reserve Bank of Australia (RBA) may help limit losses for the Aussie. RBA Assistant Governor Sarah Hunter and Deputy Governor Andrew Hauser both signaled readiness to raise rates if inflation persists, with markets pricing in a nearly 72% chance of an RBA hike to 4.60% at the next meeting [1]. Rabobank noted the RBA's hawkish turn aligns with US policy preferences, especially regarding non-housing sectors [1].
The Canadian Dollar (USD/CAD) struggled as oil prices declined, trading around 1.3840, but strategists at Scotiabank highlighted that strengthening crude and commodities could provide support not fully reflected in CAD's current value [2]. Rate and credit spreads have remained steady, but Scotiabank cautioned that volatility could increase as markets react to US inflation data [2]. Traders have largely stayed on the sidelines ahead of the CPI release, with the USD trading with a modestly positive tone against G10 currencies [2].
The New Zealand Dollar (NZD/USD) recovered from a six-week low, trading above the 50.0% retracement at 0.5806, but upside remains capped as traders await US CPI figures [3]. The PPI data has bolstered rate hike bets, favoring USD bulls and limiting NZD gains [3]. Geopolitical tensions, including escalating US-Iran conflict and elevated crude oil prices, have added to inflation concerns and supported the safe-haven Greenback [3]. A dovish tilt in the Reserve Bank of New Zealand’s policy projections also contributes to capping NZD/USD, with the pair on track for a third consecutive weekly loss [3].
CONCLUSION
The hotter-than-expected US PPI data has increased market expectations for a Federal Reserve rate hike, strengthening the US Dollar against major currencies and prompting cautious trading ahead of the US CPI report. While central banks in Australia and New Zealand signal divergent policy stances, commodity-linked currencies like the CAD and NZD remain under pressure. The market is bracing for heightened volatility as traders await the crucial US inflation data.