USD recovery aided by supportive spreads – Scotiabank

Weaker-than-expected US PCE data on Friday undercut the US dollar (USD) broadly at the start of the week, but the USD has recovered this morning to trade higher against its major peers, notes Shaun Osborne, Scotiabank’s Chief FX Strategist.

The USD could strengthen a bit more as spreads move favorably

“Fed Chairman Powell commented on Monday that the Fed was in no rush to cut rates and will cut rates over time. Meanwhile, weak euro zone CPI data fueled expectations that the ECB could cut interest rates again in October. After winning the leadership vote for Japan’s ruling LDP Party, Japanese Prime Minister Ishiba’s new government appears more cautious about the economy and the need for tighter monetary policy.”

“Yield margins have shifted relatively significantly in favor of the USD over the past few sessions, suggesting that the DXY may be able to recover a bit more ground at least in the short term. The broader DXY trends remain negative and the index’s gains may be limited to the 102 area over the next week or two. US equity futures are negative on the session, adding support for the USD on the margin.”

“Israel’s ground incursion into Lebanon does not appear to be a major factor for the markets at this time. Crude oil prices fell during the day, but to previous lows. The data released today brings a bit more insight into the US labor market via ISM/PMI and JOLTS data. There are a number of Fed policymakers speaking throughout the day (Bostic, Cook and Barkin among them are voters this year). Friday’s US NFP data is the main markets of interest this week though.”