OCBC’s Sim Moh Siong and Christopher Wong note that softer United States (US) Producer Price Index (PPI) and lower US Treasury yields have led markets to scale back expectations of a September Federal Reserve (Fed) hike, limiting US Dollar (USD) upside. Crude Oil stays in the USD80s, and a constructive risk backdrop supports carry trades. However, they warn that higher long-term US yields driven by fiscal and financing pressures remain a key risk.

Fed path, yields and carry trade risks

“The USD was mixed overnight despite lower US Treasury yields, as softer-than-expected July PPI reinforced expectations that the Fed will remain on hold in September.”

“Markets now price around a 35% probability of a rate hike next month, down from about 55% before last week’s labour market report.”

“However, the risk of further tightening remains if upcoming inflation and employment data show limited progress on disinflation.”

“A broadly range-bound USD and a constructive risk backdrop should continue to support carry trades, despite ongoing oil market volatility and persistent FX intervention risks for JPY.”

“The main threat to this favourable environment is a further rise in long-term US yields, driven by strong AI-related investment demand, persistent fiscal deficits, and continued resilience in US economic growth.”