Current US dollar and commodity levels unlikely to derail a September hike

The broad trade-weighted dollar index appreciated noticeably over the past few weeks and is now approaching the peak levels reached in March. Meanwhile, oil prices have fallen to new lows. Understandably, all of this has sparked new questions about the Fed's ability to proceed with a September rate hike. It is too early to take September off the table. The dollar is still within the recent ranges and a significant breakout to the upside is unlikely. The recent appreciation has been driven by a re-pricing of lift-off expectations from the turn of the year to September. For the upward trend to continue, the Fed would have to signal two hikes this year which is unlikely. 

If oil dips to $40/barrel or merely stays below $50 for a month or longer, it would be enough to induce a new wave of capex and production cuts. In this scenario, investment in the energy sector would probably be cut by 10-20% (compared to the 30-40% cuts in the first round), with the estimated GDP impact of around 0.2%. While not significant, this could be enough to delay a September hike. 

"our strategists view WTI below $50/barrel as fundamentally unsustainable over the longer term as it would result in too little supply vs. too strong demand. Our base case scenario remains for a September liftoff, though we acknowledge that the risks have less to do with the data and more with financial market conditions," says Societe Generale.