US Dollar: Softer labour data shifts Fed outlook – Societe Generale

Societe Generale's Kenneth Broux reports that weaker US employment data and downward revisions have significantly reduced expectations for a September Federal Reserve interest rate hike, though one move is still priced for December. The US Dollar has extended its losses as markets reassess the Fed's dual mandate and implications for bonds and foreign exchange.

The DXY needs to defend its 200-Day Moving Average of 99.18 to prevent a deeper decline. The dollar carries over losses from the previous day, and the 2s/10s Treasury curve maintains a bull steepening bias (45 basis points) after the shock decrease in US July employment and negative downward revisions have eliminated the chance of a September rate increase.

One hike remains on the table for December, but the sudden softening of the labor market invites a revaluation of the tactical outlook and opens up a wider debate about the Fed's dual mandate. After months of focusing on above-target CPI and PCE inflation, and accusations of being behind the curve, the employment situation has put the Fed outlook in a different light and raised questions about the direction of bond and foreign exchange markets in the second half of the year.

The pricing for a September hike has been reduced to less than 50% from 72% at the end of July. The DXY must now defend its 200-day moving average at 99.18 to avoid a deeper drop.