The US dollar index rose slightly during Asian trading hours on Wednesday (August 12), currently trading around 99.85. Tonight's CPI data will be a key catalyst determining the short-term direction of the dollar. At 20:30 Beijing time on Wednesday, the US will release its July CPI data. The market expects overall CPI to rise 0.1% month-on-month, with an annual rate of 3.4%; core CPI is expected to rise 0.2% month-on-month, with an annual rate of 2.5%. Given the reduced communication from Federal Reserve Chairman Warsh and significant internal divisions, this CPI report will be a key basis for the market to judge whether or not there will be a rate hike in September.

Internal divisions within the Federal Reserve and the "setting" role of the CPI

The Federal Reserve kept interest rates unchanged at its July meeting by a 9-3 vote, with the three voting members supporting a rate hike. While Fed Chairman Warsh spoke hawkishly about price pressures, his strategy of reducing communication left the market without a clear direction. Analysts pointed out that a strong CPI report "may force Warsh to demonstrate through action the stance he struggled to articulate last month." Market pricing indicates a 50/50 probability of a rate hike or maintaining the current rate; the CPI report will be the first indicator to test which side of the Fed's internal divisions better reflects the current economic reality. However, before the FOMC meeting on September 16, the Fed will receive another CPI and NFP data report, so this report will not completely determine the final decision, but it will have a significant impact on market expectations.

Inflation expectations: Price pressures may resurface.

Technically, the Federal Reserve focuses on core PCE as a policy reference, but the CPI report is equally important to traders—because it's released earlier. The "price" sub-index in the PMI report was flat last month, but if historical correlations hold, it could still point to a higher overall inflation reading. A strong CPI figure would put pressure on Warsh to raise rates in September, while a moderate reading would buy him time—including before his keynote address at the Jackson Hole symposium at the end of the month. Regardless of the outcome, the market impact of this CPI report will be significant.

US Dollar Index Technical Analysis: Initial Bottom Signals Emerging

After a sharp decline in late July, the US dollar index has shown early signs of a potential bottom. Since August, the index has found support twice at the 99.40 level and has formed a bullish divergence with the 14-day RSI—a pattern indicating weakening bearish momentum. If CPI data is strong, it could suggest a more significant bottom is forming. On the upside resistance side, if stronger-than-expected CPI data drives a dollar rebound, the first resistance level is at the psychological level of 100.00, with a break above that level targeting the 20-day moving average at 100.32. On the downside support side, if CPI data moderately pressures the dollar, a break below 99.40 could quickly lead to a move towards the 99.00 level. Additionally, there is some support around the 200-day moving average at 99.16. (US Dollar Index Daily Chart, Source: FX678)

Institutional Views

Societe Generale's Chief FX Strategist, Kit Juckes, released his latest view on August 9th, suggesting that the US dollar may trade within a range during the summer, but is relatively bullish before the end of the year, with the dollar index potentially rising by about 4% from current levels before entering a longer-term decline. Societe Generale points out that the near-term neutral stance is mainly due to the interest rate market pricing largely reflecting expectations, roughly matching the real interest rate differential; the relative strength before the end of the year may stem from the resilience of the US economy compared to other regions. However, in the longer term, slower US growth and improving European economies will gradually put pressure on the dollar. Mitsubishi UFJ, in its latest Monthly FX Outlook, predicts the dollar index will rise to 100.86 by the end of Q3, fall back to 99.29 in Q4, and then further decline to 97.74 in Q1 of 2027 and 96.19 in Q2. Near-term support comes from the market still pricing in some of the probability of a Fed rate hike, the recurring Middle East situation pushing up energy prices and long-term yields, and the relative growth advantage of the US. Mitsubishi UFJ states that the Fed under Warsh's leadership appears hesitant to raise rates, and rising inflation expectations are pushing up term premiums, which may ultimately weaken the dollar. Once the window for interest rate hikes closes and inflation subsides, the depreciation of the US dollar will become more pronounced. The bank emphasizes that the coexistence of high volatility and risky assets is unsustainable, and September-October may be a crucial window.

Summarize

Wednesday's CPI data will be a key variable in determining expectations for a September Fed rate hike. With the market pricing in a 50/50 chance of a rate hike or no rate at all, and significant internal disagreements, this report will test which side better reflects economic reality. The market expects overall CPI to rise 0.1% month-on-month and 3.4% year-on-year, while core CPI is expected to rise 0.2% month-on-month and 2.5% year-on-year. A slightly bullish reading will reignite expectations of a rate hike, pushing the dollar to a short-term bottom; a more moderate reading will solidify a wait-and-see attitude, potentially causing the dollar to fall below 99.40. The dollar index has found support at 99.40 twice and has formed a bullish divergence with the RSI, technically indicating a potential bottom. Regardless of the data outcome, this CPI report will trigger significant market volatility, especially given the Fed's lack of clear forward guidance. At 10:33 AM Beijing time on August 12, the dollar index was at 99.85.