The dollar is sitting higher across the board as it is continuing to bounce back after the plunge from Jackson Hole at the end of last week. As markets digest a more dovish tilt by Fed chair Powell, this is all continuing to reaffirm expectations for a September rate cut – which were already quite high to begin with.
As a reminder, we went to fully price in a 25 bps rate cut after the US CPI report earlier this month before pulling back on that ahead of Jackson Hole. And now, we’re seeing Fed funds futures hold around ~87% odds of a rate cut for September.
In other words, traders are not exactly going all-in just yet as they did before. Everything now rides on the upcoming US jobs report on 5 September. So, was Powell really that dovish at the end of the day?
Perhaps but I reckon there are more complexities that are playing out at the moment. That is something that should not be ignored.
Besides that, it’s best to be wary of the extent of the Fed pricing we’re seeing for the remainder of the year. Currently, traders are pricing in ~54 bps of rate cuts i.e. two 25 bps rate cuts. And that fits nicely with what almost every analyst is expecting of the Fed for now, that being one rate cut in September and one more in December.
So, we’ve already hit a ceiling in terms of dovish expectations unless traders are willing to bet that the Fed will cut rates consecutively from September through to December. That does seem like a bit of a stretch for now, especially with inflation data yet to play out.
As such, that might explain why the dollar is starting to pick itself off the floor again this week. With all the dovish expectations priced in already, the scope for further downside remains limited. In any case, the dollar run back this week isn’t all too significant for the most part.
However, EUR/USD is starting to intrigue at least with the pair now down 0.4% on the day back under 1.1600.
The pair is starting to test the lows from last week and has already erased the jump from Jackson Hole entirely. A steeper decline today will bring the pair down to fresh three-week lows with the euro also not really helped by French political worries and a lack of faith still surrounding the US-EU trade deal in general.
Elsewhere though, the dollar bounce today is much calmer. USD/JPY is up 0.3% to 147.85 but still down about 100 pips from before the Jackson Hole plunge. Meanwhile, GBP/USD is down 0.3% to 1.3445 but still keeping above its 100-day moving average of 1.3433 currently with pre-Jackson Hole levels seen around 1.3400-10.
All in all, the dollar is seen pushing back a little on the week but it’s not indicative of too much. In terms of dovish pricing, perhaps we’ve run into a wall. But in terms of any material pullback, it’s hard to imagine the pressure valve easing for the greenback until we get to the US jobs report next week.
In the days ahead though, month-end shenanigans will have a say as well
