The first data test of the week – ING

Currency volatility should increase today as US markets reopen after the long Labor Day weekend and data releases take over. The big event of the day is the US ISM manufacturing index. Remember that this has been in contraction territory (ie below 50) every month since October 2022, barring a short-lived rally in March of this year. Weakness in the manufacturing sector has been priced in for some time, and we would likely need to see a fairly weak number to set off recession alarms and send the dollar significantly lower, notes Francesco Pesole, FX strategist at ING.

DXY to flatten in 101.50/102.0 range

“Consensus is looking for a modest improvement in August from 46.8 to 47.5. One sub-index we monitor closely is the ISM prices paid, which also saw an increase this spring but has been subdued over the past two months. Consensus expectations are for a decline from 52.9 to 52.0, which should fuel the Fed’s and market’s call for disinflation.”

“Our calculations on the CFTC’s future speculative positioning data show that the dollar has moved closer to neutral positioning, with aggregate net longs against reported G10 currencies now totaling just 5% of open interest as of August 27. That’s a substantial squeeze from 16% in early July and 24% in early May. When combining this notion with a Fed pricing in a 50bp rate cut by the end of the year, the case for another major bearish segment of the dollar must be accompanied by fairly bearish expectations for future activity data from the US.”

“Our US economist is at the bottom end of consensus for payrolls on Friday, but before then there may not be enough bad news to take the dollar much lower. A flattening of the DXY in the 101.50/102.0 range is our benchmark through Thursday.”