Another soft NFP report last Friday weighed on the US dollar as traders increased the dovish bets on the Fed with around 70 bps of easing seen by year-end and very slight chances of a 50 bps cut (8% probability) at the September FOMC meeting.
After two soft NFP reports and a dovish Powell, you would expect the US dollar to be trading at new lows but that's not been the case. In fact, the greenback has been basically ranging since June.
This could be a tell that the market has reached or it's near the peak in US dollar weakness. But what could be the reason behind this resilience?
September 2024 could be the playbook...
There are strong similarities. We had a soft NFP report back then as well and the Fed decided to cut by 50 bps as an "insurance cut" in September in case the labour market deteriorated further. Also, the chances of a 50 bps cut weren't strong going into the meeting back then, too. They increased substantially after a WSJ article written by Nick Timiraos, who is widely seen as the Fed whisperer and nicknamed "Nickileaks".
There is one key difference though: they cut rates into falling inflation in September 2024 and they will cut rates into rising inflation in September 2025.
This might be the reason for the market to be cautious on further dollar weakness. In fact, if things pick up after the Fed cuts rates, we should see a hawkish repricing which is likely to support the greenback. This is exactly what happened last year after the Fed cut rates and something that I mentioned already here.
As Dario Perkins, MD Global Macro at TS Lombard, nicely said: "in the end, this game is down to judgement. You have to figure out whether there is something fundamentally wrong with the economy, or whether the stupidity of Liberation Day was akin to a freak weather event/short-term shock to sentiment."
In fact, business surveys have been all coming positive and even strengthening. The only problem continued to be a frozen labour market with low firing and low hiring. And the cause has been highly likely the uncertainty and mess created by Trump's policies in the first half of the year.
This is now behind us, so the last part of the year should show us if the economy is really picking up steam or things were worse than expected.
