As we had expected, the dollar downtrend has started to prove unsustainable, and we saw a counter-correction in DXY to the 111/112 area yesterday before a stabilisation at 111.00 during a good Asian session for risk. It’s hard to see a clear trigger for the reversal in risk sentiment yesterday, and it probably boiled down to markets not being ready to bet heavily on the Fed pivot story.
Markets are also keeping an eye on some “test cases” in the central bank sphere. While the Reserve Bank of Australia slowed the pace of hiking on Tuesday, the Reserve Bank of New Zealand stuck to 50bp increases yesterday, signalling that a 75bp move was considered and that more hikes are on the way. In our view, the latter – hawkish – narrative should prevail for the Fed, ultimately capping the recovery in risk assets and offering widespread support to the dollar.
The data calendar in the US is quite light today after yesterday’s ISM Services beat expectations (and partly offset the Manufacturing miss) and ADP labour numbers for September came in at 208k (exp. 200k). While that marks an acceleration from the revised 185k reading for August, it looks like the updated methodology still hasn’t closed the gap with the official payrolls figures, hence limiting the ADP’s predictability power.
We have quite a long list of Fed speakers to keep an eye on today: Charles Evans, Lisa Cook, Christopher Waller and Loretta Mester are all set to touch upon the economic and monetary policy outlook in scheduled remarks. We don’t see why the Fed would want to endorse any of the recent dovish re-pricing in tightening expectations – if anything, we could see some comments aimed at pushing back against any pivot speculation.
We expect a further dollar recovery into the weekend, with upside risks particularly concentrated around tomorrow’s payrolls release, when DXY may extend gains into the 112-113 area.