Is That It For the Dollar’s Rise?
The dollar has been on the retreat since last Wednesday’s Fed meeting, without much in the way of data this week to give it fundamental support. Realistically, the turn to the downside for the dollar happened after Friday’s weaker than expected jobs data. But, like we warned ahead of the data release, the NFP forecasts might not have been capturing the growing weakness in the jobs market.
The issue is that the April jobs data was sort of out of line with prior readings. But also not entirely unexpected. Which means that there are still a substantial number of traders who hope that the figures could be just a one-off, and revert to the mean that we’d been seeing so far this year. But there seems to be a growing consensus that the US economy might slow down. And that spells another trip downward for the dollar, if the data doesn’t show a substantial reversal.
Changing Expectations on the Fed
At its last meeting, the FOMC basically punted the main issue forward. They confirmed that the roll-off of the balance sheet would slow down starting in June, which is an easing move. But it was largely expected by the market and didn’t come as a surprise. The question was simply whether the Fed would announce it one meeting ahead or simply start with the June meeting.
But, since then the market’s expectations have shifted substantially. A week ago, the market was pricing in the first rate hike after September. Now that has shunted forward, with a substantial majority (67.1%) forecasting a September hike. That is somewhat important, because the Fed sort of goes on vacation in August, when there is no rate setting meeting. But August is when the Jackson Hole Symposium is held, and often is the setting for the launch of a new direction in policy. Like, for example, switching from a holding bias towards an easing bias.
Dragging the Dollar Down
Even though tradition suggests that the Fed won’t cut until September, there is still an over 40% chance of a rate cut in July that’s being priced into the market. It’s widely expected that the Fed will telegraph at least one meeting in advance that a rate cut is coming. Meaning that if that large minority of traders are right, then the Fed would have to change its stance at the next meeting. If it doesn’t, then in the short term, the market could price in a little more tightening before moving to the easing bias two months later.
The shifting outlook for the Fed is driving short-term yields lower. Generally the 2-year Treasury is seen as the most sensitive to monetary policy changes, and as it rises and falls, typically so does the dollar. But, with the unusual situation of an inverted yield curve, the dollar could keep holding on to a substantial amount of strength compared to other currencies, such as the Euro and Pound, where central banks are expected to start easing sooner.
What to Look Out For
With little in the way of economic data out of the US this week, dollar pairs are likely to fluctuate more on what’s going on in the counterpart countries. But with geopolitics still in the forefront, the dollar could stay buoyed by its safe haven status. The only major data release is consumer sentiment, which is expected to remain strong and justifying expectations of strong demand that are already factored in.
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