Indonesian Rupiah weakens as hawkish Fed tone lifts US Dollar

USD/IDR gains ground for the third successive day, trading around 17,980 during the European hours on Wednesday. The pair appreciates as the US Dollar (USD) strengthens on expectations of further Fed tightening.

The CME FedWatch tool indicates that the markets adjusted expectations for a more hawkish stance from the Federal Reserve (Fed). Traders are now pricing in a nearly 85.5% chance of a Fed hike in December, up from 61% before last week’s FOMC meeting.

US S&P Global Composite Purchasing Managers’ Index (PMI) climbed to 52.2 in June, comfortably beating May’s reading of 51.5 and signaling healthy business expansion. The US manufacturing sector showed remarkable resilience, with output jumping to 55.7 from the previous month's 55.1, easily outperforming forecasts of 54.8. Simultaneously, the Services PMI printed at 51.3, ticking up from May's 50.7 and clearing the consensus estimate of 51.0, proving that demand in the broader service economy remains incredibly sticky.

The Greenback also receives support from the uncertainty surrounding the United States (US)-Iran peace deal. US President Donald Trump stated that Iran had "fully and completely" agreed to open its facilities to nuclear inspections, while Iranian Foreign Minister Abbas Araghchi quickly tempered expectations by clarifying that substantive nuclear negotiations have not actually begun.

Moreover, Iran’s chief negotiator issued a stern warning that the strategic Strait of Hormuz will never return to its pre-war status and will remain firmly under Iranian oversight. Meanwhile, diplomatic efforts showed signs of progress elsewhere as Washington hosted a fresh round of talks between Israel and Lebanon, aimed at securing a ceasefire with Iran-backed Hezbollah.

The Indonesian Rupiah (IDR) is under pressure as traders exercise caution ahead of next week's June CPI data, amid fears that rising food costs will sustain inflationary pressures. This follows a sharp acceleration in annual inflation to 3.08% in May from 2.42% previously. Additionally, major Japanese automakers might relocate production to Vietnam, threatening future foreign inflows into Indonesian markets.