HomeContributorsFundamental AnalysisRecent Dollar Price Action Suggests Upward Momentum Stalled

Recent Dollar Price Action Suggests Upward Momentum Stalled

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Europe took center stage on Friday. July inflation jumped to 8.9% y/y (8.7% expected) and core inflation hit the 4% mark. Growth in the second quarter also surprised to the upside, expanding 0.7% q/q to be up 4% y/y. That provided merely some temporary comfort to (European) investors. German yields were looking for a countermove after a month full of losses. Advances went as high as 9 bps across the curve but the focus gradually turned back to the bloc’s imminent future, which is not looking too rosy. Eventual yield gains were capped to 3.3 bps at the front end while the 30y shed a similar amount, flattening the curve. The 10y yield stabilized around 0.82% after a steep drop within the downward trend channel in the days before. US Treasuries marginally outperformed with changes varying from +2.2 bps in the 2y but losing between 1.4 and 2.5 bps in the 5y to 30y segment. The employment cost index, which Fed chair Powell referred to during the policy press conference, rose 1.3% (1.2% expected). Spending data and the Fed’s preferred inflation (PCE) gauge beat expectations on all accounts as well. But the Chicago PMI indicated a slowing economy, declining from 56 to 52.1 as inventories, production, backlogs and new orders all fell. This kind of negative economic news in current circumstances serves as a boost to equities. Markets assume this will end up with a Fed tightening less than it currently foresees. This is not what the likes of Kashkari suggested during a weekend interview, but stocks clearly beg to differ. Europe added 1.5% (EuroStoxx50), Wall Street finished as high as 1.9% higher (Nasdaq, best month since April 2020). The dollar traded volatile. The trade-weighted measure first advanced to 106.5 before swapping gains for losses (close 105.8). EUR/USD traded a similar (opposite) pattern and managed a close north of 1.02 still. The yen outperformed again. USD/JPY fell to 133.27.News flow is thin in Asian dealings. A slew of regional PMIs were due, including in South Korea (see below) and China. The one for the latter eased more than anticipated, from 51.7 to 50.4. Output and demand indicators stayed in expansionary territory though at slower rates. Jobs however were shed at the fastest pace since April 2020. It’s causing a slight underperformance of local bourses. The yuan loses against the dollar (USD/CNY 6.75). Confidence indicators remain in the spotlights today, with the July manufacturing ISM due in the US. Looking back at the shocker US PMIs, risks for a negative surprise are mainly focused at the services sector. That said, the figure still has relevance for trading. Core bond yields tried to find a bottom end of last week but in the end it didn’t really convince. US yields this morning add a few bps but again without much conviction. Markets may stay guarded going into the services gauge on Wednesday and the July payrolls on Friday. Recent dollar price action suggests that upward momentum has stalled as markets question the Fed’s aggressive stance. Yet we don’t expect a material retracement any time soon either. EUR/USD is holding north of 1.02 and first resistance at 1.035 is still some way off. Sterling is trading quietly today just south of EUR/GBP 0.84 as it heads into the Bank of England meeting on Thursday. It is widely expected that governor Bailey will step up the tightening pace to 50 bps.

News Headlines

Hungarian central bank vice governor Virag in an interview on Friday said they will continue decisive, step-by-step monetary tightening to achieve price stability once global markets settled. Virag doubled down on the MNB’s commitment to bring inflation back down and to prevent a “self-perpetuating process”. The Hungarian forint stabilized at 404.7 to remain at historically weak levels. Short-term (swap) yields jumped into the double digits, underperforming regional peers.

South Korea’s manufacturing PMI dropped below the 50 boom/bust mark for the first time since September 2020. Output fell for a third consecutive month to 47.3, the lowest since October 2021. New orders declined for the first time in almost two years with demand affected by supply issues and rising costs. Meanwhile, firms signaled a third consecutive reduction in employment levels, often attributed to the non-replacement of voluntary leavers. Today’s PMI reading was accompanied by weaker-than-expected trade data. Imports rose 21.8% y/y compared to the 22.7% expected while exports rose 9.4% y/y (10% consensus).

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