USD Gains Moderate as Rate Expectations Decline, Eyes on PCE and NFP

USD Analysis and Talking Points

• USD Slips as the Prospect of 4 2018 Rate Hikes Decline
• US Data Remains Key for Monetary Policy Outlook, While Concerns Rise Over Trade Wars

USD SLIPS AS THE PROSPECT OF 4 2018 RATE HIKES DECLINE

The US Dollar has seen moderated somewhat in recent session with rising uncertainty over politics within the Eurozone, most notably Italy, weighing on Fed rate hike expectations for 3 additional rate rises. Subsequently, the greenback and US bond yields have looked toppish with the US 10yr yield back below the psychological 3% level. According to CME FedWatch, rate expectations for 3 additional rate hikes fell to 27% from 38% a week ago.

Source: CME FedWatch

US DATA IN FOCUS

Today will see a deluge of data out of the US at 12:30GMT, most notably the PCE figures, in which the Fed’s preferred measure of inflation (Core PCE) is expected to dip to 1.8% from 1.9%. Given the recent comments from the FOMC that they are comfortable with an inflation overshoot, a fall to 1.8% pulling back from the central banks 2% target will likely to a continued easing in market pricing for 3 additional rate hikes, consequently keeping the greenback offered. Elsewhere, eyes will be on wage inflation pressures in tomorrow’s NFP report, which are expected to tick up 0.1ppt in both the monthly and yearly readings, whereby an upside surprise will help support the US Dollar.

POTENTIAL FOR TRADE WAR ESCALATION

President Trump is set to impose steel and aluminum tariffs on imports from the EU tomorrow, which could be announced later today after the US and EU failed to produce an alternative deal. In turn, this will likely spark a retaliation by the EU as they look to defend their interests, subsequently leading to an all-out trade war, which as a result would be negative for the global growth.

USD PRICE CHART: DAILY TIME FRAME (August 2017-May 2018)

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