Dollar Recovering Amid Inflation Data, But NFPs May Decide Fate

The US dollar staged a modest recovery this week amid slightly stickier or in-line US PCE inflation numbers for July, which confounded expectations of softer prints.

Last month's NFPs revealed contraction in job creation, while the US Treasury's announcement about doubling the buybacks of long-dated bonds and using their own Treasury General Account (TGA) did little to ease concerns about the US debt, leading to a so-called dollar debasement trade.

Investors continued assigning only a 35% chance of a rate hike at the September Fed gathering, while they are penciling in only 40bps worth of rate hikes by the end of 2027. The slide in oil prices amid renewed hopes about peace in the Middle East may have also further eased inflation fears.

The dollar's fate could be altered next week with key releases including the ISM PMIs for August, and most importantly the non-farm payrolls for the month. A strong NFP report could prompt investors to bring forward their Fed hike bets.