Dollar Momentum Stretched by Downward Data Surprises

The US dollar's momentum indicators are being stretched by downward data surprises. The recent loss of jobs in July and softer inflation gauges, along with an unexpected decline in July retail sales, have downgraded the chances that three hawkish dissents at last month's FOMC meeting will convince their colleagues to hike rates next month.

The Fed funds futures finished last week with less than eight basis points of tightening discounted for next month, down from 18 bp at the end of July. Market expectations may not be impacted much by upcoming US data, which features July industrial output and preliminary August PMI.

However, the CPI and PPI will remove most of the guesswork from the July PCE deflators, which are due a few hours before Fed Chair Warsh speaks at Jackson Hole on August 26. The year-over-year headline pace is expected to have slipped to about 3.5% on the headline, with the core rate steady at 3.3%. US-China trade tensions continue to rise, with the US threatening to impose 50% tariffs on $20 bln of Canadian goods as of Wednesday, August 19.

The continued disruption stemming from the Middle East war and Iran's offensive is exacerbating stagflationary pressures, especially in Europe, which is also being hard hit by a powerful heatwave. The dollar continues to appear sensitive to changes in short-term interest rates, with a 30-day correlation of changes in the Dollar Index and the US two-year yield near 0.60.