Peso down as CPI data dash hopes of big Fed cut

The peso depreciated against the dollar on Thursday after a surprise uptick in core US inflation for August dampened hopes for a big rate cut from the US Federal Reserve next week.

The local unit closed at PHP 56.20 per dollar on Thursday, weakening by 22.5 centavos from its PHP 55.975 finish on Wednesday, Bankers Association of the Philippines data showed.

The peso opened Thursday’s session weaker at PHP 56.08 against the dollar. Its worst showing was at its close of PHP 56.20, while its intraday best was at PHP 55.96.

Dollars exchanged went down to USD 1.696 billion on Thursday from USD 1.71 billion on Wednesday.

“The peso [closed at] the PHP 56 level after the surprise uptick in the monthly growth in US core inflation tempered expectations of a strong Fed policy rate cut next week,” a trader said in an e-mail.

US consumer prices rose slightly in August, but underlying inflation showed some stickiness amid higher costs for housing and other services, further dashing hopes of a half-point interest rate cut from the Federal Reserve next week, Reuters reported.

The mixed inflation report from the Labor department on Wednesday followed data last week showing the labor market still cooling in an orderly fashion in August, defying fears of a sharp deterioration, with the unemployment rate retreating from a near three-year high touched in July.

The consumer price index (CPI) increased 0.2% last month after rising by a similar margin in July, the Labor department’s Bureau of Labor Statistics said. The rise in the CPI was in line with economists’ expectations.

In the 12 months through August, the CPI advanced 2.5%. That was the smallest year-on-year rise since February 2021 and followed a 2.9% increase in July.

Financial markets saw a roughly 15% probability of a 50-basis-point (bp) rate cut at the Fed’s Sept. 17-18 policy meeting, down from 29% before the CPI data were published, according to CME Group’s FedWatch Tool. The odds of a quarter-point rate reduction were around 85%, up from 71% earlier.

The central bank has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for a year, having raised it by 525 bps in 2022 and 2023.

Excluding the volatile food and energy components, the CPI climbed 0.3% in August after rising 0.2% in July. The so-called core CPI, seen as a measure of underlying inflation, was boosted by a 0.5% rise in shelter, which includes rents and hotel and motel accommodation, after advancing 0.4% in July.

In the 12 months through August, the core CPI increased 3.2%. Core inflation rose by the same margin in July. It increased at a 2.1% rate in the last three months.

The peso was also dragged down by demand for the dollar amid the seasonal increase in imports, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort added.

For Friday, the trader said the peso could rebound against the greenback amid a potentially weaker US producer inflation report.

The trader sees the peso moving between PHP 56 and PHP 56.25 per dollar on Friday, while Mr. Ricafort expects it to range from PHP 56.10 to PHP 56.30. — AMCS with Reuters