US Dollar: Fed outlook stays data-dependent after Waller – Danske Bank

Danske Research Team highlights that Fed Governor Waller is inclined to keep rates unchanged in September if August inflation shows further progress, but would consider a hike if inflation comes in hot. His remarks pushed September hike pricing closer to a 50/50 call and weighed slightly on the Dollar, while strong ISM services data and the upcoming US jobs report keep the Fed outlook firmly data-dependent.

Waller shifts focus to inflation and jobs data

“On the wires, Fed’s Waller said he is inclined to support keeping the policy rate unchanged at the September meeting if August inflation data shows continued progress. However, he also noted that if inflation comes in hot, he would consider a September rate hike.”

“The comments put further emphasis on the upcoming inflation release as key for the Fed’s near-term policy decision. The USD weakened slightly after the remarks, while market pricing for a September hike moved closer to a 50/50 call from around 60/40 in favour of a hike prior to the comments.”

“In the US, the ISM services index rose to 55.4 in August (cons: 54.2, prior: 54.1), coming in stronger than expected and pointing to solid momentum in the services sector. The details were also firm, with business activity, new orders and prices all increasing notably, while the employment index ticked up only slightly and remained in contractionary territory.”

“The US Jobs Report, the week’s most important data release, is due. We expect nonfarm payrolls at +65k, slightly above consensus, and an unchanged unemployment rate at 4.1%, suggesting a still-tight labour market. We expect average hourly earnings to rise 0.3% m/m. A solid report could put further pressure on the Fed to hike rates.”

“In the US there was also an initial decline on the back of Fed Wallers comments, but then yields began to rise in the afternoon and 10Y Treasuries ended unchanged.”

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