ING: The USD - FJElite

Data releases in the US yesterday were a mixed bag, offering some support to the dollar but failing to solve the market's conundrum about the September FOMC (pricing now 9bp). Core PCE, the Federal Reserve's preferred inflation gauge, printed in line with expectations at 0.2% month-on-month and 3.3% year-on-year, suggesting disinflation remains on track but at a frustratingly gradual pace. Headline PCE came in slightly firmer at 0.2% MoM and 3.7% YoY, prompting a small hawkish repricing in the USD curve.

The growth side of the report was softer. Real personal spending was unchanged in July despite higher real disposable income, with households opting to save rather than spend. Real household disposable income has effectively flatlined for more than a year.

Overall, we remain reasonably confident in our call for the Fed to hold on 16 September and, by extension, in a weaker dollar. That said, the next three weeks may need to bring a more convincing combination of data and Fedspeak before markets move closer to a hold outcome. Our concern is that, if markets are pricing roughly a 50% chance of a hike by decision day, the likelihood of a hike would increase, as the Committee may be reluctant to risk triggering bond market volatility.

Tomorrow’s speech at Jackson Hole by Kevin Warsh remains a potentially pivotal event for FX, and markets may be reluctant to build excessive USD shorts today. DXY may find support above 99.0 into the speech despite some upbeat risk sentiment after strong Nvidia results.