Macro/FX Watch: Early signs of exhaustion in dollar uptrend, Geopolitics and US inflation in focus Macro/FX Watch: Early signs of exhaustion in dollar uptrend, Geopolitics and US inflation in focus Macro/FX Watch: Early signs of exhaustion in dollar uptrend, Geopolitics and US inflation in focus

Macro/FX Watch: Early signs of exhaustion in dollar uptrend, Geopolitics and US inflation in focus

Forex 4 minutes to read
Charu Chanana

Market Strategist

Summary:  The dollar index (DXY) uptrend is starting to get challenged despite the blowout headline jobs report on Friday and the safety bid on Monday following the tragic events over the weekend. Fed members are also turning less hawkish and focus shifts to inflation data this week which could continue to fuel the higher-for-longer narrative. Meanwhile, the slide in Israeli shekel was stalled by central bank intervention.


USD: Uptrend looking stretched, but not the end yet

The dollar index closed lower last week after steady gains in the last 11 weeks, despite Friday’s blowout NFP report on the headline. The index started the week with a bid coming from a rush to safety after the unfortunate developments in the Middle East region over the weekend. However, that Monday bid was also not sustained and the DXY index is now struggling to hold on to its 106 support. Does that mean that the dollar uptrend may be coming close to an end?

We have highlighted before that clear signs of deterioration in the US economy will be needed to reverse the dollar uptrend. But all we have got for now is the strong NFP report and a further uptick in geopolitical tensions. While that should have underpinned another leg of strength in the dollar, the message coming across from the price action is one of exhaustion. Fed speaker, including some of the hawkish ones, have started to talk down the case for another rate hike as markets do the job for the Fed. Jefferson and Logan (usually a hawk) – both FOMC voters – yesterday acknowledged that the move in yields and its impact on tightening financial conditions may mean that the Fed may not have to do as much. The commentary saw dovish repricing in money markets with just a 12% probability of a hike being priced in for November (from 30% earlier) with the first full rate cut seen in June 2024.

Meanwhile, even as USD upswing room may be starting to weaken, a clear downtrend could evade until economy weakens enough to let the Fed loosen its higher-for-longer message. Saxo’s fixed income strategist Althea Spinozzi has also continued to highlight reasons to stay defensive and stick to the front-part of the yield curve. She thinks that the 10-year and 30-year Treasury auctions this week could provide support to declining yields. With US fiscal deficit still a concern, abundant Treasury supplies and risks of further escalation in the Israel situation could continue to provide support for the dollar. Risk assets are also likely to remain under pressure as high yields start to hurt the economy, and dollar exposure continues to serve as a hedge.

Market Takeaway: The USD uptrend is weakening but remains intact. Watch for close below rising trendline and support at 21DMA at 105.8 which could expose 104.39.

 

Source: Bloomberg

US CPI Preview: Focus stays on the core print

After jobs and geopolitics, focus may also be turning to US inflation numbers due this week. Bear steepening of the yield curve in the recent weeks suggests that markets are still more concerned about inflation remaining high in the long run than the risk of a recession in a near term. Meanwhile, the rise in oil and gasoline prices recently is pushing headline inflation higher. After the surge to 3.7% YoY in August, consensus now expects some cooling in headline inflation to 3.6% YoY as oil prices steadied somewhat in the month.

Core CPI is also likely to be pulled lower due to the decline in rents and shelter inflation, but some of the other services categories such as car insurance and medical services could remain sticky. Consensus expects core CPI to cool to 4.1% YoY in September from 4.3% in August. While that means overall disinflation trends could remain intact, taking too much comfort from a soft inflation print may be premature given the uncertainty around commodity prices with the geopolitical landscape facing fresh risks. Fed is unlikely to hike rates in this volatile environment, and barring any strong upside surprises, rates may likely stay on hold at the November meeting. But as long as economic data does not weaken, Fed will keep pressing on its higher-for-longer message. Meanwhile, other key data such as advance US GDP (due on 26 October) and PCE (due on October 27) will be on watch ahead of the FOMC decision on 1 November.

That leads us to believe that a higher-than-expected core CPI print could give further legs to the higher-for-longer narrative, boosting USD further and weighing on JPY as well as risk sensitive currencies like AUD and NZD. However, a softer-than-expected print will just reaffirm what the markets have already priced in – an extended Fed pause.

 

ILS: Bank of Israel supports the shekel

The Israeli shekel has come under pressure after the weekend attack from Hamas. Prior to the attacks as well, the controversial plans by the Israeli government to reform and weaken the judiciary have weighed on the currency, but weekend events brough USDILS to its highest levels since 2016.

The Bank of Israel (BoI) announced yesterday that it is prepared to sell up to $30 billion from its $203 billion FX reserves to support the shekel, and this could also be extended by $15 billion through swap mechanisms. This helped USDILS to drop back towards 3.92 from highs of 3.9622 yesterday. Israel’s central bank could continue to smoothen the volatility given its large FX reserves.

Source: Bloomberg
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.