Dollar holds firm before the CPI report

The dollar index hovered around 97.8 on Thursday, holding steady for a second consecutive session as investors awaited the release of August consumer inflation data, a key report that could influence whether the Federal Reserve opts for a larger 50 basis point cut next week.

The stability followed Wednesday’s softer producer price data, which showed a surprise 0.1% decline in August after a downwardly revised 0.7% gain in July, defying forecasts for a 0.3% increase. The unexpected drop eased inflation concerns and bolstered confidence that the Fed will press ahead with policy easing, even if the pace remains debated.

Futures markets continue to fully price in a quarter-point cut, while assigning an 8% probability to a half-point reduction if CPI prints meaningfully below expectations. The potential for a more aggressive move remains contingent on evidence of broader disinflation trends and softening in labor market conditions.

Still, with core inflation measures proving sticky in prior months, many analysts argue that Powell may favor a gradualist approach to avoid reigniting price pressures.

Political developments added a layer of uncertainty. The Trump administration announced it will appeal a federal judge’s ruling that temporarily blocked President Trump from firing Fed Governor Lisa Cook, a move that has raised questions about the central bank’s independence.

In parallel, the nomination of Stephen Miran, considered dovish and supportive of aggressive easing, advanced in the Senate Banking Committee, signaling a potential shift in the Fed’s balance if confirmed.

In currency markets, the dollar held broadly firm against most peers. The euro and sterling struggled amid subdued economic data, while commodity-linked currencies such as the Australian and New Zealand dollars remained under pressure from weaker risk sentiment. The yen traded narrowly, with safe-haven demand offsetting the yield gap with the U.S.

Overall, the dollar’s next move is likely to hinge on Friday’s CPI release and Powell’s subsequent messaging. A softer inflation print could rekindle momentum for a 50 basis point move, potentially weakening the dollar, while a firmer outcome would reinforce the case for steady 25 basis point easing and keep the greenback supported near current levels.