Dollar Sinks Further as Markets Anticipate Fed’s Rate Hike

Dollar Sinks Further as Markets Anticipate Fed’s Rate Hike

The US dollar weakened further against its major trading partners, beginning a week that includes several key data releases and the Federal Open Market Committee meeting.

The dollar started the week on a generally weak footing, especially against commodity currencies that benefitted from some recovery in oil prices and tentative signs of stabilisation in equity markets.

Overnight, US and European stock futures have slipped again despite a good performance in Chinese stocks, and that could limit the downside for the dollar today, according to ING Economic.

Analysts said they are expecting a wait-and-see approach by markets today ahead of tomorrow’s FOMC meeting, which could favour a lower volatility environment in USD-crosses. READ: Dollar Mixed as Markets Seek Assurance of Fed’s Cautious Move

On the data side, markets will watch the Richmond Fed Manufacturing Index, new home sales, and the Conference Board Consumer Confidence Index, which are all likely to have fallen further.

Despite the relevance of the consumer spending and housing narrative in the recession discussion in the US, the vicinity of a near-certain 75bp hike by the Fed tomorrow should limit the impact of the dollar of any data released today.

Incidentally, developments in Europe may continue to be a bigger driver of G10 FX dynamics for today. Any surprise development in the EU-Russia natural gas saga will impact the bloc of European currencies and by extension the dollar. But expect fewer idiosyncratic dollar moves for today.

Ahead of FOMC meeting announcement on Wednesday, the week’s highlights include home prices, consumer confidence and new home sales on Tuesday, pending home sales on Wednesday, the first look at Q2 GDP on Thursday and personal income and spending and University of Michigan’s consumer sentiment data on Friday.

Fed officials remain in a quiet period ahead of the Wednesday meeting, where a second straight 75-basis-point rate increase is expected. A 100-bp increase appears unlikely at this point but has not been completely ruled out.

A quick summary of foreign exchange activity heading into Monday shows that USDCAD fell to 1.2874 from 1.2917 at Friday’s US close and was up modestly from 1.2865 at the same point Friday morning.

There are no Canadian data releases scheduled for Monday. The Bank of Canada’s monetary policy committee next meets on Sept. 7. USDJPY rose to 136.434 from 136.085 at the Friday US close but was well below the 137.303 level at the same point Friday morning. There are no Japanese data releases scheduled for Monday.

The number of COVID cases surged last week compared with the previous week. The Bank of Japan left its monetary policy stance unchanged last week but raised its inflation expectations and lowered its growth forecasts. GBPUSD rose to 1.2052 from 1.1998 at the Friday US close and 1.194 at the same point Friday morning.

The UK’s CBI business sentiment reading fell sharply in three months ended in July from the previous three-month period, data released earlier Monday showed. The Bank of England meets next on Aug. 4, when it is expected to continue its tightening cycle with the possibility of a larger 50-bp increase.

USDEUR rose to 1.0238 from 1.0205 at the Friday US close and 1.0162 at the same point Friday morning. The German ifo business climate index declined more than expected in July, reflecting concerns about a shortage of natural gas.

After a 50-bp rate tightening at last week, the European Central Bank said it will monitor incoming data to determine the path of monetary policy but cautioned that further tightening will likely be necessary.

The EU will hold an emergency meeting today to deliberate on plans to cut gas consumption by 15%, as Russia reduced Nord Stream flows further citing technical issues.

With the US market more likely to stay in a wait-and-see mode ahead of tomorrow’s FOMC, expect most of the excitement for G10 FX to come from Europe today. In Hungary, expect a 125bp rate hike. #Dollar Sinks Further as Markets Anticipate Fed’s Rate Hike