Dollar Stays Down…For Now

The US Dollar is continuing to drift lower mid-week as traders await Friday’s all-important US inflation update. Softer US treasury yields and a strong rally in JPY are weighing heavily on the Dollar for now. The US treasury’s recent announcement that it will increase the size of its bond buyback operation from $2 billion to $4 billion has hit yields, particularly longer dated yields, helping keep USD skewed lower. Indeed, even Friday’s upside surprise in the NFP wasn’t enough to lift the Dollar, despite an uptick in September tightening expectations. CME market pricing for a hike this month is now at 60% from 50% ahead of the data. However, the fact that pricing didn’t lift higher than that suggests that the bigger focus is resting on Friday’s incoming CPI report.

Conflicting Fed Views

Dovish comments from Fed’s Waller and Williams last week tempered traders’ tightening expectations which had been stoked by hawkish comments from Fed chair Warsh at Jackson Hole. With plenty of division still visible among policymakers, Friday’s data is seen as key for determining whether the central bank is likely to hike this month or not. If the unchanged 3.4% headline CPI forecast is satisfied or beaten, this along with the rise in the NFP should see tightening expectations jump, helping USD recover. However, if CPI undershoots forecasts, this might be seen as giving the Fed room to hold out yet again, dragging USD lower near-term.

Technical Views

DXY

The bearish channel break is resuming here with price now testing the August lows around 98.60. With momentum studies bearish, focus is on a continued move lower and a test of the 97.97 level next. Below there, 96.59 is the deeper level to watch.