Dovish Fed Sentiment Keeps Dollar Under Pressure

The US dollar is likely to see further downside risks today as market pricing for a Federal Reserve rate hike in September stands at exactly 50%. This dovish outlook from the Fed, coupled with surprisingly relaxed remarks from Christopher Waller, has sent short-dated US yields lower and the dollar against major currencies. The weak August non-farm payrolls data is expected to reinforce this sentiment, with consensus estimates predicting a softish +55k number, which could make it harder for the Fed to hike rates later this month.

Despite the uncertainty surrounding the Fed's decision, investors are concluding that any tightening cycle will be modest and not enough to derail a relatively benign investment backdrop. This has led to sustained demand for high-yielding currencies like the euro and the Czech koruna. The EUR/USD is grinding back towards its pre-Warsh speech levels around 1.1650, while the CZK is seen as fairly valued after yesterday's dovish wage growth data.

The yen may have come far enough for now, with market pricing of Bank of Japan policy trajectory indicating a 45bp hike by year-end and a policy rate close to the neutral 2% rate in about a year. However, Japanese consumption remains weak, and government influence is heavy, suggesting that 100bp of tightening by year-end looks highly unlikely.