Rupiah Slips as Hawkish Fed Outlook Lifts USD/IDR

Key Moments

Fed Repricing Drives USD/IDR Higher

USD/IDR is modestly higher during Tuesday’s Asian session, trading near 17,770 after posting slight losses previously. The pair is finding support as the US Dollar firms, with investors leaning into a more hawkish narrative from the Federal Reserve.

Market participants have markedly boosted expectations for a Federal Reserve rate hike in September. Remarks from Fed officials suggesting that further tightening may be needed if inflation fails to move decisively back to the 2% objective have pushed those odds higher. Data from the CME FedWatch Tool indicate that the implied probability of a September hike has increased to above 66%, compared with about 41% one week earlier.

Attention is now turning to a dense US data calendar for additional policy signals. Upcoming releases on the manufacturing and services sectors are expected to shape positioning ahead of Friday’s August Nonfarm Payrolls report, which is seen as a key guide for the Fed’s next steps.

Strategists See USD Strength Persisting

Strategists at OCBC Group Research characterize their recent currency forecast changes as a “reset, not reversal,” stating that they “have updated forecasts after the earlier USD sell-off but still expect moderate USD strength into early 2027.” They emphasize that Fed Chair Warsh’s “hawkish tone reinforced Fed credibility,” and argue that together with “resilient growth and sticky inflation,” this should “keep policy restrictive and support the USD,” underpinning a gradually firmer US Dollar path over the coming years.

Indonesian Inflation Accelerates but Stays Within Target

The Indonesian Rupiah remains under pressure following the release of the latest inflation readings. Headline consumer price inflation in Indonesia increased to 3.19% year-on-year in August, up from 2.88% in July and modestly above the 3.13% market forecast. Despite the upside surprise, inflation remains within Bank Indonesia’s target corridor of 1.5%-3.5%.

Core inflation picked up to 2.92%, its highest level since March 2023, exceeding the 2.8% expectation. On a month-on-month basis, consumer prices rose 0.21%, signaling a rebound in price pressures.

Chinese Manufacturing Strength Offers Some Support

External conditions show signs of improvement for Indonesia’s trade outlook. Manufacturing activity in China, Indonesia’s largest trading partner, expanded for the ninth consecutive month. The RatingDog Manufacturing Purchasing Managers’ Index (PMI) advanced to 51.5 in August, beating the 50.9 forecast and reinforcing optimism about broader economic momentum.