Why the US Dollar Strength is Likely to Continue
Week Number 36 2023 Market Analysis (third update)
DERBYSHIRE GB / SEPTEMBER 8th, 2023 - The week continues to be dominated by the dollar bulls who are pricing in higher-for-longer rates from the Fed and eying another inflation tick higher next week. The next update is planned to be published after the UK labour report on Tuesday, September 12th or before if any significant event occurs.
CME Group 30-Day Fed Fund futures
September favours a hold and odds are holding at 94% from 88% last week. A 0.25 hike chance has fallen to 6% from 12%.
November favours a hold and odds have fallen to 58% from 60% earlier this week. A 0.25 hike chance has risen to 40% from 37%.
US Dollar Strength Likely to Continue
The US Dollar Index is extending its two-month long uptrend to match the macroeconomic bullish outlook. The gain is supported by last week’s NFP report and the risk-averse sentiment of investors who see the Fed holding rates higher-for-longer. This sentiment is reflected in the recent fall below the 50-day moving average of the S&P 500 while the yield on six-month treasury bonds remains steady above 5.5%.
Data released this week shows that the economy remains strong as both the PMI and balance of trade came in higher than expected. The strong economy raises the risk of sticky inflation and thus interest rates will need to stay higher-for-longer. Fed Williams (minor hawkish stance) commented that growth could be stronger than expected indicating that he may err on the side of caution and seek to raise rates further.
Next week could further strengthen the bullish outlook of the dollar, as the Consumer Price Index report for August is expected to show a rise in inflation from 3.2% to 3.4% (Trading Economics forecast), which would warrant interest rates remaining higher for longer.
Euro Weakness May Stabilise Ahead of ECB Meeting
The Euro is extending its two-month long downtrend to match the macroeconomic bearish outlook. The fall is pressured by last week’s EA CPI report which showed a climb to 5.3% during August as well as a strengthening dollar. This sentiment is reflected in the recent fall below the 100-day moving average of the DAX while the yield on six-month German bunds remained steady above 3.6%.
Data released this week shows that the economy is slowing as the retail sales report came in lower than expected with a contraction of 0.2% as well as the third estimate for Q2 GDP coming in at 0.1% when it was expected at 0.3%. The slowing economy is likely to cause a lack of foreign investment and cause further losses on EU stocks.
Next week could see the bearish outlook of the euro soften as the ECB Governing Council meeting is expected to hold interest rates at 4.25% (Trading Economics forecast) although they are unlikely to signal any future cuts.
Pound Bulls Have No Narrative
The Pound is extending its two-month long downtrend to match the macroeconomic bearish outlook. The fall is pressured by a stronger dollar rather than particular pound weakness. This sentiment is reflected in the steady moves of the FTSE 100 and slightly falling yield on six-month gilt bonds from around 5.6%.
Data released this week have been quiet for the UK but the US shows signs of a strong economy which pressures the Fed to keep high or possibly raise further.
Next week could see the bearish outlook of the pound soften as the final Q2 GDP estimate for Q2 is set to remain at 0.2% although the unemployment rate may tick higher to 4.3%. There is the potential for a weaker GBP/USD as the outlook for the dollar is likely to strengthen the bulls as the Consumer Price Index report for August is expected to show a rise in inflation from 3.2% to 3.4% (Trading Economics forecast), which would warrant interest rates remaining higher for longer.
Gavin Pearson
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Specialises in forex G7 currencies
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