FX Daily: Dollar's Fate Hangs on Data as Rates Decline Further

FX Daily: Dollar rebound increasingly hinges on activity data

The further decline in USD rates means that it will now be up to activity data to trigger a recovery in the dollar. We have a couple of days packed with important US releases into the weekend, as well as a key OPEC+ meeting. Inflation figures in the eurozone may not have a huge impact on the euro.

 

USD: Data takes over

The dollar has found some support despite bullish sentiment on US bonds with Treasury yields breaking through key levels. When rates previously jumped in the US, the dollar proved highly sensitive to the initial move and less so as the bond sell-off continued: something similar appears to be happening now as Treasury yields extend their drop. That said, a key argument for a dollar rebound was probably the fact that the rate differential was still more favourable to the greenback than what the dollar level was implying: now, 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.

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. The consensus is for a rebound to 218k. Personal spending data is also key given the centrality of resilience in consumption in the soft landing debate: the consensus is for a decline to 0.2% in both personal income and personal spending in October. 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.

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, 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. We still expect 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.