Federal reserve comments trim dollar gains ahead of today’s PCE
Market comment on behalf of Konstantinos Chrysikos Head of Customer Relationship Management at Kudo.com
The US dollar edged lower on Wednesday alongside Treasury yields after recent gains, although it remained near multi-week highs and on course for a monthly advance. Markets reacted to New York Fed President John Williams’ comment that another interest rate hike before year-end may be warranted but stressed there was no urgency, prompting traders to cut the probability of an increase at the next meeting to 47% from around 70%. However, multiple interest rate hikes are still priced in, keeping yields elevated and limiting the currency’s downside.
Europe’s energy shock and renewed concerns over French public finances and political uncertainty have put pressure on the euro. Against the yen, however, the dollar is on track to lose ground this month, as the risk of coordinated Japan-US intervention remains relevant, limiting the dollar’s upside even while US yields remain elevated.
Looking ahead, the dollar is likely to remain supported near recent highs unless incoming data materially weaken the case for further tightening. With the next-meeting hike probability now close to even, today’s core PCE carries greater repricing risk in both directions. A firm reading could quickly rebuild interest rate hike expectations and lift both yields and the dollar, while softer inflation could push the next move further out and extend the pullback. The GDP data release today, ISM manufacturing on Thursday, and Friday’s payrolls will provide additional tests.
Zaid Barem / ymm
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