FX Daily: Will the DXY be unlucky a third time?

DXY appreciated 1.3% in August after two months of depreciation. As of 30 August, DXY closed at 103.2, modestly below the 103.5 level at the end of 2022. Like February and May, the USD’s recovery in August was lifted by the Fed’s push for “higher for longer” rates this month. The DXY’s rally in February was derailed by Silicon Valley Bank’s failure, triggering financial stress and US rate cut bets in March. Meanwhile, the EUR and the GBP recovered on receding recession fears. The DXY’s rebound in May was cut short by the Fed’s pause in June, disappointing US nonfarm payrolls and CPI inflation data fuelling belief that the Fed delivered its final hike in July. Meanwhile, the European Central Bank maintained a hawkish tone while the Bank of England delivered a larger 50 bps hike on 22 June. DXY capitulated below 100 for four sessions around mid-July.

The question now is whether the USD will be unlucky a third time.

The DXY rallied 4.3% to 104 from July’s low into the Fed’s Jackson Hole Symposium on 24-26 August. During his press conference at the FOMC meeting on 26 July, Fed Chair Jerome Powell said Fed staff had stopped forecasting a US recession. Since then, the Atlanta Fed GDPNow forecast model lifted its 3Q23 GDP growth forecast to 5.9% QoQ saar from 2.4%. Meanwhile, EUR buckled after the ECB warned that the Eurozone’s outlook had deteriorated and opened the door for a pause in September. GBP gave back gains on an unwinding of oversized bets in BOE hike expectations after UK inflation eased meaningfully, with the BOE returning to a 25 bps hike in August.

On 16 August, the FOMC minutes highlighted significant risks to inflation. Less than a week earlier, CPI inflation rose to 3.2% YoY in July for the first time since June 2022, while core CPI inflation remained high at 4.7% YoY above the 2% target. Today, consensus also sees the PCE deflators rising to 3.3% from 3% for headline inflation to 4.2% from 4.1% for core inflation. At Jackson Hole, Powell believed inflation was more responsive to labour market tightness than in the past. Hence, markets are paying attention to tomorrow’s nonfarm payrolls, which consensus expects will hold below 200k a third month after yesterday’s disappointing ADP employment report. However, we cannot rule out surprises because ADP and NFP have been moving in opposite directions over the past couple of months.

Powell also ruled out rate cuts this year and would look at the “totality of data” to decide between a hike or pause at the next FOMC meetings. This would include the CPI release on 13 September before the FOMC meeting on 20 September. Interest rate futures expect any Fed hike to come later in November after the advanced GDP report in late September. However, the September FOMC meeting is still important. Apart from not removing the second hike pencilled in June’s Summary of Economic Projections, the Fed might tweak its forecasts to augment its “higher for longer rate” stance. Barring surprises, DXY does not have the financial stress in March that led to the Fed pause in June to drag it significantly lower. For now, we see DXY holding a 102.4-104.5, wedged between its 50- and 100-week moving averages.

Quote of the day
“The way to get started is to quit talking and begin doing.”
Walt Disney

31 August in history
The Walt Disney Company announced its acquisition of Marvel Entertainment for USD4.24bn in 2009.

Philip Wee

Senior FX Strategist - G3 & Asia

philipwee@dbs.com

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