US Dollar: Staying strong as Fed expectations hold – ING

ING strategist Francesco Pesole observes the dollar's strength despite falling oil prices and improved global risk sentiment, attributing it to hawkish Federal Reserve statements maintaining dollar support. Robust US labor data and minimal influence from geopolitics bolster the likelihood of an October Fed increase, with ING targeting the DXY at 101.0 for the near future.

The dollar's remarkable resilience to reduced energy costs and a risk-friendly atmosphere signifies that the Fed narrative dominates, and hawkish statements are sufficient to keep demand for USD high. Richmond Fed President Thomas Barkin, scheduled to vote in 2027, echoed this sentiment yesterday, stating that a single rate hike might not suffice to tame inflation.

He also pointed out that a robust labor market would help sustain consumer spending, suggesting that a change of heart among the hawks may need evidence of labor market weakening. However, high-frequency job indicators have stayed strong, with initial jobless claims below 200k and ADP reporting a rise in weekly hiring to 20k at the beginning of September.

Expectations are growing for a strong September payroll figure, ranging from 80-100k. Geopolitical factors have had a minimal effect on foreign exchange (FX) yesterday. President Trump's United Nations speech produced few distinct market signals, while constructive negotiations with Iranian representatives and the reopening of the Saudi East-West pipeline led to Brent oil falling below $100/bbl.

Whether this trend continues into a more prolonged decline remains uncertain. From a rates standpoint, oil prices hovering between $90-100/bbl are unlikely to prompt a switch in market expectations towards a dovish stance. We will need to wait for more news from New York before tomorrow's Trump-Xi meeting. The Fed's tone is subdued today, and the data schedule only includes S&P Global PMIs, which are less significant for markets than the ISM surveys.

Despite this, we still believe the dollar could face upside risks in the coming weeks, with a DXY reaching 101.0 being a realistic near-term objective.