US Dollar: Yields support Greenback strength – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong highlight that resilient US data, sticky inflation and elevated energy prices are pushing US Treasury yields higher and supporting the US Dollar. They flag next week’s US labour report as a key risk, noting that falling jobless claims raise the chance of an upside surprise that could reinforce expectations for further Fed tightening.

Firm data keeps USD supported

"Resilient US economic data, elevated energy prices and persistent inflation concerns continue to drive Treasury yields higher, underpinning the USD while weighing on rate-sensitive and carry oriented assets."

"Next week's US labour market report is a key event risk. Bloomberg consensus expects non-farm payrolls to rise by 100,000 in September, down from 162,000 in August, while the unemployment rate is projected to remain at 4.1%."

"Although Fed Chair Warsh has indicated a preference for the four-week average of initial jobless claims as a more timely gauge of labour market conditions, the payrolls report remains the market's primary focus."

"With initial jobless claims trending lower through the month, the risk of an upside payrolls surprise is increasing. A stronger-than-expected employment report could reinforce market expectations for further Fed tightening, keeping US yields elevated and providing additional support for the USD."

"Recent Fed rhetoric has also remained hawkish. New York Fed President Williams and Cleveland Fed President Hammack warned that inflation risks remain skewed to the upside, while Philadelphia Fed President Paulson said "modest further tightening" may still be warranted if inflation fails to moderate."

"Market pricing currently implies around a 70% probability of another 25bp rate hike in October, highlighting the market's growing conviction that the Fed's inflation fight is not yet over."

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