U.S. Dollar Softens Amid Key Job Data Imminence
The U.S. dollar slightly weakened on Monday yet stayed closely aligned with its highest point in nearly two weeks. As we move toward the week's end, investors have their eyes set on a significant U.S. jobs report due Friday. The Federal Reserve's recent shift from aggressively battling inflation to focusing on potential job losses has made these upcoming figures crucial. Analysts underline that the job data will heavily influence the size of the anticipated Federal Reserve interest rate cut. Currently, market expectations lean towards a 25 basis point cut.
Earlier, the dollar had reached its strongest level since August 20, buoyed by an increase in long-term U.S. Treasury yields. This rise was attributed to inflation data, which pointed to a less drastic rate cut. Additionally, favorable U.S. GDP figures suggested that the economy was robust enough to allow the Federal Reserve some flexibility in policy easing. Presently, traders estimate a 33% probability of a 50-basis-point cut this month, in contrast to last week's 36% estimation.
Economic Indicators Play a Pivotal Role
"Currently, economic indicators are in the spotlight," stated Athanasios Vamvakidis, global head of forex strategy at BofA. He anticipates the dollar could weaken in the year's second half but cautions against over-optimism. Vamvakidis forecasts the euro targeting $1.12, citing that while the U.S. economy is decelerating, it still outperforms global counterparts.
The dollar index, which measures the greenback against six major peers, dropped slightly by 0.08% to 101.67 after hitting 101.79, a peak not seen since August 20. It had previously dipped to 100.51 last week, a first since July 2023, following Fed Chair Powell's strong indication of imminent policy easing. Meanwhile, the euro climbed 0.2% to $1.1060, having recently hit a low of $1.1043.
European Political Dynamics and Economic Outlook
In European politics, the Alternative for Germany (AfD) was expected to become the first far-right party to lead a regional election in Germany post-World War Two, according to projections. This development, while giving the AfD unprecedented influence, is likely to see them excluded from governance by other parties. Christian Schulz, deputy chief European economist at Citi, remarked on the AfD's strategy of resisting power until achieving a majority. Concerns linger among investors that political gridlock in Berlin and Paris could hinder European integration initiatives crucial for growth and global influence.
Money markets have adjusted expectations regarding the European Central Bank's (ECB) rate cuts following persistent inflation in August's services sector and a lack of new easing signals from policymakers. The market now prices in 59 basis points worth of cuts by year-end, down from 67 basis points post-German inflation data release and 70 basis points mid-August.
Anticipated Macro Data and Market Reactions
A U.S. public holiday contributed to a sluggish start for the dollar. However, an influx of macroeconomic data, peaking with non-farm payrolls on Friday, is expected. Economists predict the addition of 165,000 U.S. jobs for August, improving from July's 114,000 increase. Data in line with consensus forecasts suggest a soft landing and a likely 25 bps Fed rate cut this month. "If job figures fall to or below 100,000, the risk of a hard landing rises, potentially prompting a 50 bps rate cut," Vamvakidis noted.
On Monday, the dollar increased by 0.40% to 146.74 yen. Despite this, analysts argue it would be challenging for the dollar to strengthen against the yen while the Fed considers rate cuts. On account of the U.S. holiday, Treasury bonds will not trade, although the 10-year yield remains at 3.9110% after a 4.4-bps rise last Friday.
