Skewed risks
US core PCE data was released on Friday. Mildly softer inflation has allowed some limited US Dollar selling pressure. Due to revisions in US rate expectations, risks to the US Dollar that are driven by inflation publications are significantly skewed towards soft inflation releases. Friday’s data showing 0.2% month-on-month core inflation therefore caught the market’s attention. The conclusion so far is that significantly more evidence would be needed to change the market’s opinion that the Fed won’t need to cut rates on inflation grounds anytime soon. Let’s not forget, however, the Fed has a broader mandate than many other central banks. For the Fed and its policy setting Committee, employment matters too.
Dollar sensitive data is therefore far from in the rear view mirror. Today, JOLTS data will provide another option for markets to scrutinise the US economy. However, this data will likely serve more to raise speculation over the non-farm payroll data and labour market report due to be released on Friday. Based upon the skew highlighted above within USD trading dynamics, it will also be softer labour market data that could prove more destructive to the Dollar than strong jobs data could prove to be constructive. Such risks will continue to develop should data continue to fall short of forecasted levels, as we have seen evidenced by yesterday’s contractionary PMI figures.
Recall also that due to trade and market influences, any consideration of the Dollar’s value is also intrinsically concerned with the value of the Euro and EURUSD. Thursday’s ECB decision could therefore prove to exacerbate USD volatility particularly within emerging market pairs. Whilst markets will be digesting election results in Mexico and South America, EM implied volatility remains near recent highs.
Discussion and Analysis by Charles Porter
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