US Dollar: Data-driven outlook in focus – MUFG

Analysts at MUFG, including Lin Li, Michael Wan, Lloyd Chan, and Khang Sek Lee, emphasize that upcoming U.S. economic data will play a crucial role in determining the outlook for the U.S. Dollar. Softer Purchasing Managers' Index (PMI) and labor market figures have already reduced near-term Federal Reserve tightening expectations, yet inflation remains above the target level, and the odds of a December hike remain elevated.

The focus will be on industrial production and PMI surveys in the coming week to gauge the extent to which the recent moderation in U.S. producer prices and labor market data will impact the dollar's strength. Recent weaker job figures and producer prices have modestly reduced near-term Fed tightening expectations, but with inflation still well above the Fed's 2% target and the likelihood of a December hike still high, closely watched data will include industrial production and PMI surveys.

Stronger-than-expected economic activity data could further support the belief that the Federal Reserve needs to maintain a restrictive policy for a longer period. In the latest market moves, GBP/USD has gained traction in the American session, trading at its highest level in a month at around 1.3550 and heading towards a positive weekly closing. The U.S. Dollar faces pressure following disappointing Retail Sales data, aiding the pair's upward movement.

Meanwhile, EUR/USD has gathered bullish momentum, trading above 1.1550 in positive territory. The U.S. Dollar weakens ahead of the weekend as markets scale back expectations for a September rate hike following disappointing July Retail Sales and UoM Consumer Sentiment data. Gold (XAU/USD) rebounds and approaches $4,400 after opening in negative territory, falling to a fresh weekly low of $4,311, driven by a softer U.S. Dollar and fading expectations of an imminent Fed interest rate hike.

Despite the rebound, the metal remains below its two-month high of $4,449, touched on Thursday. Actual July inflation data came in as expected, with a 0.1% month-over-month increase in headline CPI and 0.2% excluding food and energy. However, annual headline inflation remains too high at 3.4%, indicating that wage earners are experiencing stagnant spending power at best, and core inflation is slightly above the 2% inflation target.