The US dollar will likely finish the day at the lows today. It’s been a rollercoaster week with the greenback erasing most of the losses triggered by Powell’s dovish tilt just to give the gains back heading into the weekend.
Today there was no meaningful catalyst for the downside as the PCE data came out in line with expectations. We could argue that the selloff in the stock market might have had a part in dollar’s weakness but it could also be just month-end flows as the momentum picked up going into the London Fix.
Nevertheless, the focus has now turned to September. It’s going to be a huge month for markets. We will get the NFP and CPI reports and of course the FOMC meeting. Right now, the markets are pretty sure that we will get a cut no matter what with 89% probability. The total pricing for the year stands around 55 bps, which is two rate cuts.
This change of heart was triggered by the last NFP report which came out softer than expected with big negative revisions to the prior figures. The Fed made it pretty clear that they are more focused on the labour market than inflation because they expect the pick up in inflation to be, wait for it, “transitory”.
The NFP is going to be key for the dovish expectations but the market will likely start positioning before that based on other inputs like the ISM PMIs and especially the ADP report. Next week is going to set the trend at least until the US CPI.
Strong data might take the probability for a September cut
towards a 50/50 chance but will certainly see a more hawkish repricing further
down the curve and support the dollar. Soft data, on the other hand, will
likely see traders increasing the dovish bets with a third cut by year-end
being priced in and weighing on the greenback.
Some would argue that all of this doesn’t matter and the erosion of Fed independence will keep weighing on the dollar. I personally think that this Fed independence narrative is noise (for now).
You could also argue that even if we get a soft report, the rate cuts will improve economic activity in the next quarters and the hawkish repricing in rates will eventually be bullish for the dollar. This is something I keep in mind, but I would wait for the actual rate cut to start experimenting with this idea and then the data will either confirm or invalidate it.
Anyway, let’s take things at a time and focus on the next week’s data…
On the monthly chart, we can see that we are trading inside a rising channel. We got a bounce from the lower bound back in July following a strong NFP report, and since then we basically just ranged waiting for more clarity on monetary policy. Technically, we either rally from here or break below the lower bound and extend the losses at least until the 90.00 handle.
On the daily chart, we can see more clearly that the downtrend that began at the start of the year, bottomed in July when we bounced from the lower bound of the channel and broke above the downward trendline. Since then we basically ranged, even though we had a short term rally heading into the July’s FOMC decision that was later erased by the soft NFP report.
This article was written by Giuseppe Dellamotta at investinglive.com.