US Dollar: Warsh speech keeps markets cautious – ING

ING strategist Francesco Pesole interprets recent US Personal Consumption Expenditures (PCE) Price Index data as indicating disinflation, albeit at a pace too slow to prompt Federal Reserve (Fed) rate increases this year. Pesole predicts the Fed will maintain interest rates on September 16, and anticipates a weaker Dollar, though warns that hawkish market pricing and Kevin Warsh's Jackson Hole speech could increase the odds of a rate hike and support the DXY near 99.0.

Yesterday's US data releases were a mixed bag, providing some support for the Dollar but failing to address the market's uncertainty surrounding the September FOMC meeting (currently priced at 9 basis points). The core PCE, the Federal Reserve's preferred inflation gauge, met expectations at 0.2% month-over-month and 3.3% year-over-year, signaling disinflation continues on track but at an unwelcome slow pace.

The headline PCE showed a slight uptick at 0.2% MoM and 3.7% YoY, leading to a modest hawkish shift in the USD curve. However, real personal spending remained steady in July, despite higher real disposable income, as households chose saving over spending. Real household disposable income has essentially stagnated for over a year.

The concern lies in the possibility that if markets price roughly a 50% chance of a hike by decision day, the likelihood of a hike would rise, as the Committee may be hesitant to risk bond market volatility. Warsh's upcoming speech at Jackson Hole could be a crucial factor for FX, and markets may hesitate to take on excessive USD shorts before the event.

The DXY may find support above 99.0 during the speech, even with some positive risk sentiment stemming from strong Nvidia results. Overall, the outlook remains cautiously optimistic for the Fed holding on September 16, and a weaker Dollar. Yet, the next three weeks may require a more compelling mix of data and Fed statements before markets settle on a hold outcome.