Indonesian Rupiah holds losses as US Dollar receives support from Fed hike bets

• USD/IDR holds gains as the US Dollar receives support from rising Fed rate hike bets.
• The CME FedWatch tool shows that markets are pricing in a 63.4% probability of an interest rate increase in September.
• Traders await Indonesia’s June inflation data following an El Niño-driven spike in May food prices, keeping markets on high alert.

USD/IDR inches lower after opening at a bullish gap, remaining in the positive territory and trading around 18,000 during the Asian hours on Friday. The pair holds gains as the US Dollar (USD) finds support from growing expectations of a Federal Reserve (Fed) rate hike. According to the CME FedWatch tool, markets have priced in a 63.4% probability that the Fed will raise interest rates during its September 15–16 meeting.

This hawkish sentiment is fueled by accelerating inflation data, with the headline Personal Consumption Expenditures (PCE) Price Index climbing to 4.1% year-over-year in May, up from 3.3% in April. This surge, the first time the headline figure has breached 4.0% in three years, is largely attributed to rising energy prices stemming from the Middle East conflict, keeping the prospect of further rate increases this year firmly on the table.

Furthermore, the Fed’s preferred inflation gauge, the core PCE index, rose to 3.4% year-over-year, up from 3.3%. This represents the highest annual core reading since October 2023.

Market participants are keenly awaiting next week's release of Indonesia’s June inflation data, keeping a close eye on food costs after El Niño-induced supply issues triggered the fastest annual surge in seven months this past May. Despite these brewing inflationary concerns, deeper market weakness was successfully cushioned by strong foreign capital inflows. International investors poured roughly IDR 105 trillion into the central bank's one-year securities and government bonds throughout June.