The dollar has continued to edge lower in the wake of last week’s payrolls shock and a weak ISM reading this week as US interest expectations adjust lower. Given the extent of that adjustment – money markets now discount ~125bp of rate cuts over the coming month, starting in September – we see the scope for a rebound in rate expectations and the dollar. Our assessment is that the labour market is not falling off a cliff and that inflation is set to pick up further, limiting the FOMC’s room for easing policy. Next week’s US inflation data, and Chair Powell’s keynote speech at the Fed’s Jackson Hole conference the following week provide the key potential catalysts for another reassessment of the policy outlook ahead of September.
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