The US Federal Reserve's favorite inflation indicator falls to 27-month lows

The Federal Reserve's favored gauge of inflation dropped to its lowest point in over two years.

A two-day period of weakening was halted by the dollar index, which began to recoup its losses.

In August, the Core PCE Price Index (the US Federal Reserve's preferred measure of inflation excluding food and energy) was 0.1% higher than the previous month, which was lower than the expected 0.2% increase. This rate of monthly growth was also seen in July 2022.

The Core PCE Price Index saw an annual growth rate of 3.9% in August, which was in line with expectations. This was the lowest rate of growth since May 2021.

After increasing in the previous month, the Federal Reserve's favored measure of inflation started to decline again, demonstrating the regulator's success in controlling core inflation. Goldman Sachs anticipates that the core US consumer price index will drop to 2.9% in December.

UBS has predicted that in the short-term, there is an increased likelihood of the dollar becoming even stronger.

Scotiabank stated that they had anticipated a correction to the dollar's strong trend for some time, however the recent drop may simply be due to short-term movements at the end of the month and quarter. A considerable decrease in the USD would necessitate a major alteration in the long-term rate differential against the dollar.

The dollar index is likely to continue its growth towards 107-109 due to high absolute and relative yields, as well as stable oil prices.

Commerzbank believes that the dollar will be particularly responsive to any data that does not back up the idea of a "soft landing" for the US economy.

ING believes that the possibility of a US government shutdown will not have a majorly negative effect on the dollar. It will take a significant event to cause the dollar to decline, and it is likely to remain strong until mid-October, when US companies in California will be required to pay taxes.

ING notes that domestic news and the overall atmosphere indicate a decline in EUR/USD.

Rabobank predicts that the Eurozone is likely to experience a technical recession in the second half of the year, followed by a slow recovery in the following year. This could lead to further downward pressure on the euro, resulting in EUR/USD dropping to 1.02 in the next three months.