US DOLLAR PROJECTIONS:

FORECAST FOR USD: NEUTRAL

Despite Powell’s hawkishness, the Dollar Index (DXY) Ends its Sixth Straight Week of Gains with a Whimper.

The likelihood of a rate increase in November increases.

The Fed may benefit from a massive week of data ahead of the September meeting.

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ON HAWKISH POWELL MESSAGE, RATE HIKE PROBABILITIES INCREASE

Following another week of mainly strong US data, the US Dollar has increased its gains for a sixth straight week on the strength of a hawkish statement from Fed Chair Powell in Jackson Hole. Despite Powell’s hawkish remarks, the DXY struggled on Friday because it appeared that most of what the Fed Chair had to say had already been factored into the market before he took the stage. Risk assets, which had a bullish Friday to round out a mixed week, mirrored this.

In the wake of Fed Chair Powell’s speech, there was some oscillation in the likelihood of a rate hike. After everything was said and done, the odds of a rate increase in September remained unchanged, but the chances of one in November have increased from about 42% to 49.8%, which is what caused the brief run for the dollar on Friday. However, as the day went on, the majority of these gains by the Dollar Index were lost.

As they attempt to strike a balance between the likelihood of resurgent inflation and the risk of overtightening, central banks have an increasingly difficult task as they approach their inflation targets. According to this week’s PMI data, even though rate rises are already in force, input costs have slightly increased, which may signal future persistent inflationary pressure. In his speech, Fed Chair Powell hinted as much, saying that the Fed is in a position to move cautiously while not completely ruling out additional rate hikes. Given that the labour market continues to be strong and that demand is still high, employment is considered as a sticking point for the US Fed. The longer this situation persists, the higher the likelihood that inflationary pressure will develop in the future.

US TRUSTEE YIELDS

The US 10Y shot up early in the week to levels last seen in 2007, and US Treasury rates had a mixed and fascinating week. Early in the week, long-dated rates benefited, but a spike on Friday, following Chair Powell’s speech expanding the yield curve inversion once again, saw the US 2Y reach its YTD high just shy of the 5.1% percent level. This is partly caused by the belief that higher rates will persist in the near future.

US 2 Year and US 10 Year Yields

NFP AND PCE DATA MAY SET UP SEPTEMBER FED MEETING IN THE COMING WEEK

We have a lot of high-impact data items coming up next week that are anticipated to have a big impact on how the Fed operates leading up to the September meeting. The Federal Reserve continues to be perplexed and concerned by the lack of a slowdown, despite the fact that labor data has stayed strong and unemployment claims have held up nicely. According to Friday’s remarks by White House Economic Advisor Bernstein, the labor market is still a major driver of inflation because demand is so high. This gives this week’s NFP report more significance and might have an impact on the Fed Funds rate odds as well.

According to certain remarks made this week by the Fed and the White House Economic Advisor, the Fed’s preferred inflation indicator is still the Core PCE data, and labor costs continue to be a sticking point. Demand is at sustained high levels in the US economy, which has been linked to a tight labor market and strong consumer expenditure. We will also receive the US’s second estimate of GDP figures. A truly fascinating woman