US Dollar struggles near 103.00 as Fed rate cuts remain in centre stage

LONDON (August 16) The US Dollar (USD) slips in Friday’s European session. The asset struggles to hold the recovery seen on Thursday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers below 103.00 after recovering from a 10-day low of 102.27 on Thursday.

The Greenback bounced back strongly as traders’ fears about a recession in the United States (US) ebbed after the release of the upbeat US economic data, which also supported bond yields. 10-year US Treasury yields fall to near 3.91% in European trading hours, but are decently up from their weekly low of 3.81%.

The data on Thursday showed that the US Retail Sales grew at a robust pace in July after contracting in June. Retail Sales, a key measure of consumer spending, rose strongly by 1% against expectations of 0.3%, diminishing fears of a hard landing.

Also, fewer-than-expected Americans filing for jobless benefits for the first time for the second consecutive week indicated that labor market conditions are not as bad as they seemed after the release of the Nonfarm Payrolls (NFP) data for July. The US Department of Labor showed that Initial Jobless Claims came in at 227K, lower than estimates of 235K and the prior release of 234K.

Daily digest market movers: US Dollar drops as bond yields slump

• The US Dollar struggles to hold its recovery move as upbeat US economic data has dashed market expectations that the Fed will begin its policy-easing cycle with an aggressive approach. Market participants started anticipating a 50-basis-point (bps) interest-rate reduction from the Fed in September amid worries that the US could enter a recession.
• According to the CME FedWatch tool, 30-day Federal Finds Futures pricing data shows that the likelihood of a 50-bps interest-rate reduction has diminished to 29.5% from the 51% recorded a week ago. However, the speculation that the Fed will cut rates in September remains intact.
• Meanwhile, Fed policymakers have also admitted that interest rate cuts have become appropriate as risks have now widened to the labor market too. This week, Atlanta Fed Bank President Raphael Bostic said in an interview with the Financial Times (FT) that he is open to rate cuts in September. When asked about the rate cut size, Bostic said that he is comfortable with half a percentage point if the labor market deteriorates further.
• Going forward, investors will focus on Fed Chair Jerome Powell’s speech at the upcoming Jackson Hole (JH) symposium, which will be held from August 22-24. Fed Powell is expected to provide cues about the interest rate cut path as inflation remains on track to return to the desired rate of 2% and the labor market is not overheated anymore.

FXStreet