The United States Dollar is set to finally snap its weekly losing streak this morning after the release of US data buoyed the currency.
Overview
At the time of writing, the Dollar is set for its first weekly gain in more than a month. After yesterday’s GDP reading showed further positive signs for the larger US economy, today’s PCE numbers, along with personal income and spending data, provided a further boon to the Buck. The Federal Reserve’s preferred inflation gauge this morning showed that prices grew 0.2% last month and 2.5% on an annualized basis, concurrent with market expectations. As a result, treasury yields declined, and the Dollar picked up more strength.
At the time of writing, interest rate swaps now show that traders believe there is a 20% chance that the Fed will cut interest rates by 50 basis points at its September meeting, down from a 35% chance of such an action two days ago. The Fed’s very measured outlook on policy decisions looks, day by day, more reasonable, and markets are attempting to fall back in line with such expectations. Through the rest of this calendar year, traders expect 97 basis points of easing from the Fed, which is down markedly from the potential of 150 basis points of cuts traders had priced in after the ‘flash crash’ earlier this month. Markets were very concerned at the front end of this month about the possibility that the US may be headed for a recession, but after a few very stable data releases, such fears have begun to subside.
All told USD is set for its best weekly performance since early June, but this comes in the face of heavy losses last week, still placing the Buck at a distinct monthly loss. As the dog days of summer wrap up, European holidays end, and month-end flows come into place, we may see more volatility in FX markets as a whole through next month.
What to Watch Today…
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JPY ⇓
Japanese Yen, ever the volatile currency, is losing ground to the tune of a third of a percent against USD this morning after US data showed positive progress on domestic inflation. Safe haven currencies in general, save for the US Dollar, are having a rather bad day – since US data was fairly benign in the grand scheme of things, riskier assets are outperforming the traditional safe haven of JPY. The Yen, however, on a monthly basis has performed positively after the Bank of Japan spooked markets in a very material way earlier in August.
EUR ⇓
The single currency is once again on the back foot this morning after both the release of US PCE and spending data and various Eurozone inflation figures earlier today in European trading. Euro-region inflation on a headline basis fell down to close to the European Central Bank’s two percent target through this month, which does give the central bank a bit more breathing room on monetary policy through the back end of this year. The ECB, along with the Fed, is largely expected to cut interest rates by 25 basis points at its September meeting, but the medium-term outlook for the ECB is quite murky when it comes to policy decisions at the end of this year.
