US Dollar: Relief rallies seen shallow – BBH
Brown Brothers Harriman’s Elias Haddad notes that the US Dollar (USD) has recovered part of its recent losses as concerns over the Federal Reserve’s (Fed) credibility ease, but sees limited scope for a sustained rebound.
US Dollar (USD) experienced a brief recovery following the easing of concerns over the Federal Reserve's (Fed) credibility, but analysts from Brown Brothers Harriman (BBH) predict the rally will remain shallow. The US labor market is in balance, with wage growth aligned with the Fed's 2% inflation target, and strong productivity growth is expected to support disinflation.
Upcoming Q2 non-farm productivity data could influence near-term rate expectations. Meanwhile, the Swedish krone (SEK) resisted the general USD trend, with Sweden's mixed July CPI keeping a Riksbank hike by year-end a possibility. Brent crude oil prices remain just below $80 per barrel after an Iran-Oman provisional agreement hinted at increased energy flows through the Strait of Hormuz.
The easing of the US Fed's credibility gap has contributed to the USD relief rally, as US 5y5y inflation swaps have retraced much of the gains caused by Fed Chair Kevin Warsh's lack of credible policy implementation. However, USD rebounds are likely to stay limited, as the greenback is trading in line with interest rate differentials.
The US labor market is balanced, wage growth is consistent with the Fed's 2% inflation target, and Fed policy remains restrictive, assuming a neutral rate of 3.00%. Services hiring is weaker, suggesting patience from the Fed, but the resurgence in services price pressure indicates inflation risks have not fully subsided. This raises the cost of waiting to increase rates, potentially pushing the Fed behind the curve.
Fed funds futures continue to show a 60% chance of a September rate hike. Strong US productivity growth, such as the 3.2% year-over-year increase in the Employment Cost Index (ECI), poses a disinflationary force for the Fed. The next non-farm productivity report is due today, at 1:30pm London, 8:30am New York. GBP/USD traded slightly defensive at the end of the week, falling to the low 1.3600s after reaching fresh highs above 1.3670 earlier in the day.
Meanwhile, EUR/USD faced modest losses around 1.1670 after failing to advance past 1.1700. Gold rallied past the $4,600 mark, breaking through three-month peaks, despite rising US Treasury yields and a greenback rebound. Cryptocurrencies are bullish as Bitcoin surpasses $77,000, with Ethereum and Ripple also on the move. The US Treasury adjusted its liquidity support buyback operations, doubling the size of operations in the 10-year to 20-year and 20-year to 30-year sectors, effective September 9 and running until November 4.
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