Dollar Slides Amid Weakened Rate Hike Expectations, Pound Resilient

The US dollar has continued to trade on a softer footing this week as market participants have become less confident that the Federal Reserve will hike rates in response to the energy price shock.

US yields fell further below their high of 4.26% earlier this week, reaching 4.12%. This decline is attributed to the slowdown in private employment and wage growth, which has limited evidence of higher energy prices spilling over into core inflation since the US-Iran conflict started.

The dovish repricing of Fed rate hike expectations continued even after the components of the PPI report that feed into calculating the PCE deflator were more lively than expected. However, the BEA's revision to its methodology for calculating PCE portfolio management prices will subtract at least 0.2ppts from the current rate of core PCE inflation.

The ongoing decline in short-term US rates has provided a headwind for the US dollar performance this month but hasn't been enough to trigger another leg lower after the sell-off at the end of last month. The dollar index continues to trade above support from its 200-day moving average at around 99.200.

The pound, however, has been performing well, driven by strong private consumption growth and business investment in Q2. Business investment has increased by around 13% since Q4 2019 and the IT sector saw a boost from AI-related demand, resulting in stronger service sector growth.