- The dollar ended last month lower due to a surge in expectations for a Fed rate cut.
- The Australian dollar gained after data revealed hotter-than-expected inflation.
- This week, the US will release its all-important employment report.
Currency futures edged higher on Monday as Fed rate cut bets remained elevated after Friday’s inflation figures. However, traders were cautious at the start of the week, as the US will release its pivotal monthly employment figures.
Dollar monthly change (Source: Bloomberg)
The dollar ended last month lower due to a surge in expectations for a Fed rate cut. It was down 2% last week against its peers as Fed officials showed more support for rate cuts. John Williams said there was a possibility of a rate cut, depending on incoming data. Meanwhile, Christopher Waller said he fully expects a cut this month and more to come in the near future.
Their comments came quickly after Powell hinted at a likely rate cut during the Jackson Hole symposium. This shift to a more dovish tone has given traders more confidence to price a rate cut this month. As a result, the dollar remained subdued last week despite some upbeat economic data.
Notably, the US released its preliminary GDP report, which revealed an expansion of 3.3% compared to the forecast of 3.1%. A separate report revealed that the core PCE increased by 0.3% as expected, keeping rate cut bets intact.
Meanwhile, the Australian dollar gained after data revealed hotter-than-expected inflation. The report eased pressure on the Reserve Bank of Australia to cut interest rates. Meanwhile, in Canada, the GDP report revealed an unexpected 0.1% contraction that could push the Bank of Canada to consider rate cuts.
Traders also paid attention to developments in the conflict between Trump and the Fed. However, reactions in the market remained muted.
“Interestingly, the FX reaction function to policy announcements and developments with the Fed seems fairly muted – this could be a function of illiquid summer markets,” said Citi’s Tobon. “Or it could be a function of markets expecting any changes at the Fed will lead to a cutting cycle similar to what is already priced. That reinforces our view that it will be all about the data.”
This week, the US will release its all-important employment report that will further shape the outlook for rate cuts. Additionally, traders will focus on a GDP report from Australia and employment figures from Canada.
