After the US CPI report this month, the US dollar seemed destined for a significant breakdown. However, as USD/JPY found support for a rebound, so did the dollar, as previously highlighted. The dollar remains the weakest major currency this month, but the situation could have been far worse.
As the month nears its end, dollar buyers can find relief in avoiding a more disastrous scenario, particularly against the euro and pound. The BOJ played a part in USD/JPY’s recent jump, limiting the pair’s monthly decline to “only” 1.3% thus far.
Looking ahead, the dollar’s fate hinges on critical data, especially the US non-farm payrolls and labor market report coming later this week. The Federal Reserve’s stance on inflation and interest rates will also be pivotal in the bigger picture. While there are suggestions of a Fed pivot, it remains uncertain.
Currently, market pricing aligns with a potential Fed pivot, which may not bode well for the dollar’s prospects. However, the US economy continues to deliver stronger data compared to other major economies that appear to be faltering.
In Europe, credit conditions are tightening, raising concerns for the economy in Q3 and Q4. In the UK, the cost-of-living crisis persists, along with the risk of stagflation. In terms of rate differentials, the dollar still holds a favorable position, as many major central banks are expected to pivot alongside the Fed.
Despite potential challenges, the dollar retains some positive attributes. As long as the US economy avoids a hard landing, the dollar might find support or at least not depreciate too rapidly.
Fed funds futures indicate that traders expect the first rate cut to occur in either March or May next year. However, if the market’s pricing is inaccurate, and the Fed maintains higher rates while waiting for inflation to decrease, the dollar could receive a significant boost.
In retrospect, this situation is reminiscent of a previous story where traders foresaw the Fed funds rate falling to 4.30% by December. Today, that pricing is projected at 5.37%. The dollar’s trajectory will depend on how these factors unfold, making it crucial to stay updated and well-informed.
