Key Talking Points:
- PCE, consumer confidence, and ISM data may give insight into USD positioning ahead of NFP next week
- GBP/USD, NZD/USD and EUR/USD looking vulnerable despite small bounce
The Dollar Basket (DXY) is at yearly highs after having its best weekly performance since June. The Dollar has been on a tear this week as currency traders position themselves for an earlier than expected rate rise after last week’s FOMC meeting left a hawkish feeling in markets. The Daily chart shows how the DXY has pierced through this year’s high (93.73) but is starting to face resistance between the September (94.79) and October 2020 (94.30) highs.
DXY Daily Chart
The reaction wasn’t immediate, bond yields were picking up straight after the meeting last week as higher rates and inflation expectations were being priced in, but it wasn’t until Monday that USD traders picked up on the move. Despite that, the Dollar has continued to gather bullish momentum whilst yields have come off slightly from their recent highs. As long as markets remains confident that the Fed will start tightening monetary policy within the next few months then the Dollar should remain supported at current levels.
And a good test of that confidence may come as soon as this afternoon. The August PCE Price Index is due to be released at 1.30pm and whilst the data in itself may not be the most enlightening given how the Fed has already agreed that the inflation component has met the requirements to start tapering, investors are likely to be keeping an eye out on the data anyway to make sure things are moving in the right way. Later today we also have the Michigan consumer sentiment and ISM manufacturing PMI, two sentiment-driven data points that are likely to give an insight into the current state of play of confidence within the economy.
A recently resurfaced theme within markets is the fear of stagflation, whereby inflationary pressures remain high but growth stagnates. Whilst the threat isn’t immediate given the amount of stimulus in the economy, today’s data points could breathe more air into this line of thought if the divergence between growth and inflation widens, something that Powell has already warned about, citing it will be one of the biggest challenges over the coming years if price pressures turn out to be less transitory than originally expected. The FOMC meeting has also put a lot of pressure on the NFP data next Friday as a return to full employment is the missing link for tapering to begin.
So far the gains in the Dollar have been most evident against those currencies that were excessively pricing in hawkishness from their Central Banks, like the Pound and the Kiwi. GBP/USD remains below 1.35 this morning despite an attempted breakout in yesterday’s session, whilst NZD/USD has jumped back in a recent support area which may see fresh buying efforts above 0.69.
GBP/USD and NZD/USD Daily Chart
EUR/USD, on the other hand, has been more resilient to the Dollar move as markets are also starting to price in a little more hawkishness from the ECB, which is commonly thought of as one of the most dovish central banks. That said, the pair is having its worst week since June and has fallen below recent support at 1.1613which leaves the door open for a move towards 1.14.
EUR/USD Weekly Chart
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— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin