The U.S. dollar consolidated gains on Tuesday as markets awaited a speech by Federal Reserve Governor Kevin Warsh at the Jackson Hole symposium, which could influence expectations for the September Federal Open Market Committee meeting. According to the analysis, the Fed is still seen holding rates steady on Sept. 16, though the risk of a hike has risen as markets price roughly a 50% chance of tightening.
U.S. data released Monday offered mixed signals for the dollar. The core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, rose 0.2% month-on-month and 3.3% year-on-year in July, matching expectations and reinforcing a gradual disinflation trend. However, real personal spending was unchanged, with households opting to save rather than spend despite higher disposable income, which has effectively flatlined for over a year. The PCE report also showed a slight uptick in the services component to 0.2% MoM and 3.7% YoY, prompting a modest hawkish repricing in interest-rate swaps.
The dollar index held above 99.0, supported by cautious positioning ahead of Warsh’s remarks. The analysis suggests that if the Fed speaker signals a preference for maintaining optionality, the dollar could face renewed selling pressure. Conversely, a hawkish tone might reinforce expectations for a September hike, particularly if market pricing remains elevated.
The Australian dollar bucked the broader trend, gaining ground despite hotter-than-expected July inflation data. Headline CPI rose 3.5% year-on-year, while the trimmed mean measure climbed 3.6%, pushing markets to price a 28-basis-point increase by year-end—a 15bp jump since the start of the week. Strong household spending data for July, up 7% year-on-year, further bolstered hawkish expectations. However, the analysis still leans toward a prolonged hold by the Reserve Bank of Australia, noting that unemployment has edged higher and house prices are declining. The RBA is expected to await additional data before concluding that the inflation pickup is more than transitory.
The Canadian dollar lagged, with the analysis warning of further downside potential, particularly against crosses, amid ongoing U.S.-Canada trade tensions. Meanwhile, the euro stabilized around 1.1640–1.1670, with geopolitical risks in Ukraine failing to materially impact the single currency. Energy prices edged higher after reports suggested Russia may escalate its military campaign, though commodity markets remain focused on Middle East developments.
In Japan, Tokyo August CPI data, due at 00:30 BST Wednesday, is expected to show headline inflation at 1.9% year-on-year, down from 2.0% in July, with core CPI at 1.8%, unchanged from the prior month. The analysis expects the print to have little impact on BoJ rate-hike expectations for Sept. 18, where a 21bp increase is currently priced. However, risks remain skewed toward a dovish outcome, even if the BoJ tightens, given the recent narrowing of the two-year USD:JPY swap rate differential by 35bp over the past 30 days. The yen’s failure to strengthen below 158 underscores the challenge of sustaining gains without broader Fed dovishness.
