USD: Finally aligned with the Dot Plot

The blowout US jobs report on Friday prompted the kind of hawkish repricing in rate expectations we thought would have materialised over a few weeks. Markets no longer have pretext to look through Federal Reserve Chair Jerome Powell’s pushback against 50bp cuts, and are now finally aligned with the Dot Plot projections: 25bp cuts in November and December. Crucially, there may not be any catalyst for a fresh dovish rethink until the end of October, when new jobs and activity indicators are released, ING’s FX analyst Francesco Pesole notes.

DXY to trade around 103.0 at the end of October

“The inflation figures released this week (CPI and PPI) should not really change the picture for Fed pricing and the dollar, as some substantial surprise would be required to draw attention away from the jobs market dynamics. Our economists see September core CPI slowing back to 0.2% month-on-month after the surprising 0.3% in August. That is also the consensus view – but while few economists are calling for another 0.3% print, no one seems to be expecting 0.1%.”

“The FX market has suffered a hard reset as the notion of an aggressively dovish Fed has now evaporated. Coincidentally, there has been more dovish communication from other developed central banks, like the European Central Bank, the Bank of England and the Bank of Japan. We cannot see a driver for rebuilding structural USD short positions in the next couple of weeks.”

“Finally, we are four weeks away from the US presidential elections and there is still a chance markets will favour defensive (USD-positive) positioning ahead of a tight contest. All in all, barring some noise around data releases, geopolitics and US political news, the dollar seems more likely to consolidate recent gains than trend back to mid-September levels. We expect DXY around 103.0 at the end of October.”

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