US Dollar: Higher hurdle for sustained gains – MUFG

MUFG analyst Derek Halpenny suggests that the US dollar faces a higher hurdle for sustained gains as markets await key economic data before the Federal Open Market Committee's September meeting. Weaker than expected US job data did not provoke a strong reaction in the dollar or rates, as traders await the Consumer Price Index (CPI) and Nonfarm Payrolls (NFP) releases before the FOMC meeting.

The slowdown in wage growth to pre-Covid levels, reduced inflation pressures from the labor market, and hawkish FOMC communications have contributed to sustaining dollar pricing. Friday's negative NFP print is expected to influence FX sentiment during the early part of the week, leading up to the CPI release on Wednesday, which is a major macroeconomic indicator.

With two more CPI reports and an additional NFP report before the next FOMC meeting on September 16th, market participants have become cautious about removing too much pricing for a potential hike at that meeting. The probability of a hike has decreased from 55% to 40%. However, the year-over-year average hourly earnings fell from 3.5% to 3.2%, indicating a full retracement to pre-Covid wage levels and highlighting the absence of inflationary pressures in the labor market.

The CPI data released on Wednesday will provide further insights, and a weaker-than-expected core CPI print (the third month in a row) could bolster dovish arguments at the FOMC meeting. However, the absence of any significant market reaction this week is also possible, given that September data points lie ahead before the FOMC meeting.