Notwithstanding the euphoric attitude around US Treasuries and the breakthrough of important levels by Treasury rates, the dollar has found some support after remaining low sugar.
In the past, when US interest rates spiked, the dollar was quite sensitive to the first move and less so as the bond sell-off persisted. According to ING analyst Francesco Pesole, this looks to be the case right now as Treasury yields continue to decline. A plethora of economic data had preceded the US dollar in the market, but other bellwether currencies had obscured its hue.
According to Pesole in the FX note, one of the main reasons for a dollar comeback is likely the fact that the rate disparity still favors the dollar more than what the dollar level was suggesting: at this point, the room for a dollar rebound has shrunk based on pure rate fundamentals. In other words, US activity data needs to do the heavy lifting in a dollar recovery by reviving bond bears, ING analyst added.
Yesterday, the second release of 3Q US GDP showed even stronger growth (5.2% quarter-on-quarter annualised) than the preliminary 4.9%, but core PCE was weaker (2.3%) than the first release.
“We now have two busy days on the data side into the weekend. Today, jobless claims will be closely watched after last week’s drop to 208k, and given the proximity to payrolls”.Naira Devaluation Deepens Economic Crisis in Nigeria
PCE inflation – the Federal Reserve’s favourite indicator – is also expected to have slowed in October. That would not be a game changer for the dollar, however, since the disinflation story appears to have been absorbed by markets, and activity indicators hold considerably higher importance for FX, Pesole said.
Fedspeak is also under very close scrutiny now. Rising bets on Fed easing have not been met by the sort of pushback we had heard in previous instances, and that is allowing dovish expectations to get stickier.
Admittedly though, ING analyst said most comments by Fed officials continue to be about the short-term monetary policy outlook. Yesterday, Loretta Mester, Raphael Bostic and Tom Barkin all discussed the prospect of another hike – something markets have completely priced out and may only reconsider if inflation were to rebound materially.
Incidentally, more and more FOMC members are endorsing the pause narrative, which is already fully priced in but is widening the path for market doves to speculate on future meetings.
“We are still doubtful the Fed will want to sit and watch as rates fall, given the lingering interest to keep financial conditions tight at the current juncture, so a more decisive pushback against rate cut bets remains a tangible risk for the FX market, and a secondary path for the dollar to find support outside of US data”, ING analyst said.
The market still expects DXY to climb back above 103.00, but watch for growing selling interest around 103.50 until (and if) key data releases halt the UST rally.
It is also OPEC+ meeting day, and our commodities team believes the cartel will be focused on not disappointing the market, although downside risks for crude have admittedly risen
