US Dollar: Payrolls-driven consolidation as CPI looms – TD Securities

TD Securities analysts highlight that the US Dollar (USD) experienced a decline after an underwhelming July Payrolls report, but they anticipate limited downside against G10 currencies unless US inflation softens further, potentially reducing Federal Reserve interest rate hike expectations. They suggest that EUR/USD may face challenges in breaking above 1.16 without a favorable CPI reading, while USD losses could intensify against select emerging market currencies.

The Federal Reserve is expected to maintain interest rates unchanged through 2026 and 2027. Despite the negative headlines, market sentiment rallied due to a decrease in the unemployment rate to 4.1%. This resulted in a decline in the September hikes pricing from 3bp to 12bp. Although a rate hike remains a possibility, the team's projections for core and headline CPI for the upcoming week (0.20% m/m and 0.15% m/m, respectively) could lead to additional expectation of rate cuts.

Given that most of the recent rate increase surge was driven by Fed expectations, rates may decrease as hikes are ruled out. The team maintains the expectation of the Fed keeping rates on hold for 2026 and 2027, with September pricing potentially remaining significant as the Fed continues to analyze data before making a decision.

As long as there is no removal of near-term Fed rate hike pricing, the USD's cumulative return in US trading hours is unlikely to turn negative. In particular, EUR/USD will need a strong upward move beyond 1.16 without soft US CPI data to break the barrier. The USD trended lower after the weak payrolls report, and the team believes the USD should maintain support against G10 currencies. However, the USD selloff could find more room against select EM currencies.