USD: Wait-and-see ahead of ADP
This week is all about reassessing December Fed rate cut expectations. That process began with Chair Powell’s press conference last Wednesday and continues with FOMC member remarks and the limited data still being released. The dollar has already rallied on a 7bp hawkish repricing in the December Fed Funds futures contract, but with 16bp still priced in, a cut remains the market baseline – and there’s room for further hawkish rethinks. We remain in the dovish Fed/bearish USD camp, but the risks are significantly more balanced now.
Recent Fed commentary has clearly suggested lower conviction on a preset easing path, which implies some greater data dependency. December has been described as a “live meeting” by the dovish-leaning Lisa Cook, while Mary Daly noted the FOMC should keep an “open mind” yesterday. The challenge, however, is that this heightened data focus comes at a time when the usual release schedule is disrupted by the government shutdown, which still has no clear end in sight. As a result, the few data points we do get – especially tomorrow’s ADP report – can have an outsized impact on markets, while the broader lack of data may lead to more spells of directionless FX trading.
JOLTS data won’t be released today, so rangebound trading may persist ahead of tomorrow’s pivotal ADP figures. The Fed speaker to watch today is Michelle Bowman. She leans dovish and is a potential chair candidate – if she joins the cautious tone on December, it could prompt more hawkish repricing and USD support.
This morning, we are seeing a sizeable drop in USD/JPY. That is likely being driven by more verbal FX intervention from the Japanese finance minister and a drop in global equity futures. It is a signal that the yen remains a go-to currency for safe-haven demand (which has been lacklustre of late), but also that the extensive short positioning on JPY can fuel rapid rallies.
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