US Dollar: Real yields drive correction risk – ING

ING’s Chris Turner notes that US real yields and the US Dollar (USD) fell after a confusing FOMC press conference, as markets sensed the Federal Reserve (Fed) may avoid further tightening. He highlights upcoming United States (US) Gross Domestic Product (GDP) and core Personal Consumption Expenditures (PCE) Price Index data as key drivers, warning that downside surprises could weigh on the Dollar and that US Dollar Index (DXY) may correct toward 100.50 ahead of the September FOMC.

Fed messaging and data steer Dollar

"Last night's FOMC press conference was a little confusing. Looking at the market's reaction, the conclusion was that the Fed was not going to be as tough on fighting inflation as initially thought and might try to wriggle through this period of high inflation without hiking."

"Chair Kevin Warsh's celebration of higher real yields and the more 'direct' message from the markets was taken as a view that the Fed had outsourced monetary tightening to the markets, reducing the need for hikes."

"Having risen 60bp since the June FOMC meeting, two US real yields fell 7bp yesterday and undermined the dollar. Presumably, we will not receive much of a steer from the Fed before its September meeting, and it will be the data which determines whether the Fed will hike."

"DXY probably risks a correction back to the 100.50 area and the two sets of CPI prints and jobs data before the 16 September FOMC meeting will determine whether DXY has topped for the year."

"For today, the focus will be on the first look at 2Q GDP data (expected at 2.0% QoQ annualised) and the core PCE inflation data for June. The latter is expected to have slowed a little, with core PCE at 0.2% month-on-month and the year-on-year rate dropping to 3.3% from 3.4%. Any downside surprises here could hit the dollar given the emerging view that the Fed is trying to avoid tightening."