FX Market Update: Dollar Strengthens on Higher-For-Longer Narrative Amid US Data Resilience

FX Daily: Higher-for-longer narratives unfold

A strong services ISM read helped consolidate the notion of higher-for-longer rates in the US, helping the dollar stage another rally. In the UK, Bank of England commentary is shifting away from 2023 hikes to a similar narrative. Meanwhile, the EUR, SEK and other pro-cyclicals remain vulnerable despite better Chinese data.

 

USD: 2024 part of the USD curve driving dollar higher

September has so far seen the dollar’s bullish momentum cement, and DXY is testing the 105.00 levels this morning – the highest seen since March. We want to stress that the bulk of the dollar strengthening is coming from easing bets in 2024 being scaled back rather than any expectations that the Federal Reserve will hike again this year.

Let’s take the pricing of the USD forward rate curve for the two meetings in November 2023 and June 2024 as an example. The former has been stable in pricing in a peak rate of around 5.60-5.65% (less than one hike from the current 5.50%) since the start of July, having been capped by evidence of disinflation and Fedspeak that has gradually diverged from the dot plot projections. The June 2024 contract has faced multiple hawkish re-ratings, from a 4.75% bottom in mid-July to the current 5.25%.

A market that continues to push forward the start of Fed monetary easing, embracing a “higher for longer” narrative on the back of US activity data resilience, is offering few reasons to doubt the dollar will stay supported for now. Yesterday, August’s ISM services index beat expectations and also suggested re-building inflationary pressures, which should keep the Fed away from sounding too dovish as they are expected to keep rates on hold at the September policy meeting.  

There are many Fed speakers to watch today: Patrick Harker, Austan Goolsbee, John Williams, Raphael Bostic and Michelle Bowman. On the data side, things are much quieter, and the focus will only be on the weekly jobless claim figures, which are expected to climb to 234k.

We discussed earlier this week how the dollar was overvalued in the near term against all G10 currencies. This is still the case, although a further hawkish repricing in Fed rate expectations would compress the mis-valuation, and the current market conditions can keep the dollar expensive for longer. A consolidation into the 105.00/105.50 in DXY looks plausible at this stage. Overnight, we saw a less pronounced slump in Chinese exports compared to expectations, but the beneficial impact on pro-cyclical currencies is proving quite modest, once again showing how the US activity and dollar story is the predominant one.