Dollar Pauses For Now

The US Dollar continues to soften ahead of the weekend as the recent downshift in October Fed tightening expectations caps the rally for now. Last week’s softer-than-forecast US labour market data saw market pricing for an October hike plunge below 20% from around 50% pre-data and highs of 70% at the start of last week. Despite that shift, USD has remained underpinned on the back of the recent rally with DXY holding just below the monthly highs. This is partly seen as suggesting that the broader focus remains on further tightening by year end with a December hike still priced around 70% for now, and partly because of the heavy weakness we’ve seen in EUR and JPY recently, feeding into better demand for USD.

Hawkish Fed Commentary

Speaking this week, Fed’s Waller said that additional rate increases would likely be necessary in order to bring inflation back to the Fed’s 2% target. This echoes the hawkish sentiment we’ve heard from several Fed policymakers over the last fortnight. However, Waller also noted that the Fed did retain ‘flexibility’ in determining the pace of this tightening, with this comment seen as further endorsing a pause in tightening this month. Looking ahead, any incoming data strength will be seen as more of a boost for December tightening chances, with this month written off now, and should drive USD higher. However, any fresh data weakness (particularly in jobs or inflation readings) should start to eat into December tightening expectations, potentially driving a correction lower in USD.

Technical Views

DXY

For now, the index remains atop the 101.91 level and while this support holds, focus is on a continuation higher with the 103.20 level the next bull target. If we slip back below 101.91, however, a retest of the broken bear trend line from summer highs will be first support ahead of the bull channel lows and 100.18 level beneath.