On Wednesday (August 12) during the Asian session, the US dollar index fluctuated narrowly, currently trading around 99.85, approaching the psychological level of 100. Geopolitical uncertainty boosted safe-haven demand—signals from the Pakistani defense minister that the US and Iran were close to reaching an agreement initially lifted market sentiment, but Trump's subsequent hardline stance demanding reparations from Iran quickly dampened optimism. Market expectations for a September rate hike remain evenly split, and tonight's CPI data will be a key variable determining the short-term direction of the US dollar.

Recurring geopolitical risks are supporting the US dollar due to safe-haven demand.

On the geopolitical front, market sentiment experienced a rollercoaster ride. Pakistan's defense minister stated that Washington and Tehran were close to reaching an agreement on the Strait of Hormuz, while parallel negotiations between Iran and Oman reportedly entered a deeper stage—this news initially improved market risk appetite. However, Trump subsequently adopted a tougher stance, insisting that Iran must pay reparations, causing market caution to resurface and safe-haven funds to flow back into the US dollar. The recurring geopolitical risks provided support for the dollar, keeping it strong ahead of the CPI data release. Analysts at Commerzbank pointed out that the market focus was on whether inflation was falling fast enough to prevent the Federal Reserve from raising interest rates; the direction of price pressures was considered central to determining the dollar's medium-term outlook and yield trends.

Fed rate hike expectations: Market remains 50/50

The latest data from the CME FedWatch tool shows that the market's probability of a 25 basis point rate hike by the Federal Reserve in September is about 48%, a slight decrease from 52% the previous day, remaining in a near 50/50 stalemate. This subtle change reflects investors' weighing of multiple factors: on the one hand, the recent rise in oil prices due to geopolitical risks provides arguments for a more aggressive policy stance, with the market worried that rising energy prices could reignite inflationary pressures; on the other hand, the weak performance of the July non-farm payroll data has led some market participants to doubt the necessity of a rate hike, believing that the labor market has shown signs of cooling, and further tightening could exacerbate the downside risks to the economy. The current pricing stalemate is essentially a direct clash between inflation concerns and growth concerns. The US July Consumer Price Index (CPI) data released tonight will be a key variable that breaks this balance. If the data is strong, the probability of a rate hike may quickly rise and exceed 50%; if the reading is moderate or even lower than expected, expectations of a wait-and-see approach or even a rate cut may further intensify. With the Federal Reserve communicating less forward guidance, the market is heavily reliant on a single data point to recalibrate expectations of the policy path, resulting in a significant increase in volatility.

Goolsby stated that inflation is the "biggest problem," but his tone remains hawkish.

In his latest public speech, Chicago Federal Reserve President Austan Goolsby clearly stated that the current labor market is "stable but not strong," while inflation and affordability are "the biggest problems facing the economy." His speech received a significantly higher overall rating than historical averages, sending a hawkish signal to the market. Goolsby emphasized that inflation remains a core challenge that policymakers need to address first, further reinforcing the bias towards maintaining a restrained stance on monetary policy. While acknowledging that the job market is not overheated, he highlighted the continued impact of price pressures on households and businesses, demonstrating his high level of vigilance regarding inflation stickiness. It should be noted that Goolsby is not a voting member of the Federal Open Market Committee this year, and his personal statements have limited direct impact on the final policy outcome. However, as an influential regional Fed president, his remarks further solidified market concerns about inflation risks and echoed similar statements from other officials recently, adding an extra hawkish tone to market sentiment ahead of tonight's CPI data release.

Summarize

The US dollar index rose for the third consecutive trading day to around 99.90, approaching the psychological level of 100. Geopolitical uncertainty boosted safe-haven demand—the Pakistani defense minister released optimistic signals that the US and Iran were close to an agreement, but Trump's subsequent demand for reparations reversed sentiment, causing safe-haven funds to flow back into the dollar. Market expectations for a September rate hike remain evenly split, and tonight's CPI data will be a key variable that could break this balance. Goolsby's speech emphasized that inflation remains the "biggest problem," sending a hawkish signal, and the FXS sentiment index remained hawkish. If the CPI data is moderate, the dollar may face downward pressure; if inflation exceeds expectations, rate hike expectations will reignite, and the dollar is expected to break through the 100 mark. Before the data and geopolitical news become clearer, the US dollar index is expected to maintain a slightly bullish and volatile pattern. (US Dollar Index Daily Chart, Source: EasyForex) At 15:12 Beijing time on August 12, the US Dollar Index was at 99.83.