US Dollar: Softer labor data supports downside – BNY

BNY’s Geoff Yu and David Tam note that weaker United States (US) labor data have lowered real-rate expectations and extended the Dollar decline, creating a more supportive environment for risk assets and duration. They stress that upcoming United States (US) Consumer Price Index (CPI) and Producer Price Index (PPI) releases will be crucial for Federal Reserve (Fed) pricing, with softer inflation reinforcing current easing expectations and stronger prints quickly lifting front-end yields.

U.S. inflation data drive Dollar path

"The weaker U.S. labor-market signal has pulled down real-rate expectations, extended the dollar decline and reopened a window for duration and risk assets."

"Last Friday’s weak U.S. nonfarm payrolls report – at -23k vs. the expected 80k – and the accompanying downward revisions meaningfully cooled expectations for a Fed hike in September, leaving the market with a less than 50% chance of a hike."

"Of the week’s releases, Wednesday’s CPI is the most important for rates markets, as it will tell us whether the disinflationary impulse stemming from June’s easing in Iran-related tensions is durable or whether price pressures will pick up."

"A soft inflation bundle would reinforce the post-NFP easing in Fed pricing and support duration; an upside surprise could quickly reintroduce pressure on front-end yields."

"The environment has become more supportive, but not more forgiving."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)