Friday’s August jobs data was again on the soft side. It was soft enough to have the market starting to speculate whether the Federal Reserve would restart its easing cycle with a 50bp rate cut – as it did last September. The data triggered a 0.5% sell-off in the dollar, which has now largely been retraced. Limiting that dollar sell-off, we believe, has been political developments overseas. France today sees a confidence vote in the proposed 2026 budget (see below), where the government is expected to fall. And this weekend saw the resignation of Japan’s Prime Minister, Shigeru Ishiba, which is adding to fears in the bond market about the prospect of looser fiscal policy emerging.
For reference, Japan will now hold an LDP leadership election on 4 October. Here, one point of focus will be whether someone like Sanae Takaichi comes to power on a ticket of fiscal expansion and slower normalisation of monetary policy. Given FX markets now seem to be taking fiscal risks far more seriously, the weekend development has seen USD/JPY gap above 148. What we would say, however, is that USD/JPY was already discounting a lot of political risk and may again stall in the 148.50/149.00 area rather than pushing above 150. That said, politics may now delay the drop towards 145 – which had been our call for the end of September.
For the dollar itself, this week carries some important inputs, too. Tomorrow sees the preliminary annual benchmark revision to the 2025 nonfarm payrolls report. A number in the -500 to 800k is expected. The Fed’s Christopher Waller implied a number of around -720k in his speech just over a week ago. A big downward revision to NFP could trigger some limited dollar weakness. Expectations are now moving towards a 150bp easing cycle by next summer – taking the policy rate to 3.00%.
Also on the US agenda this week is Thursday’s release of August CPI, where risks of a 0.4% month-on-month figure (consensus 0.3%) could provide the dollar with some temporary support. That could also hit Treasuries as well, which see $119bn in 3, 10 and 30-year auctions this week. Our rates strategy team share their latest thoughts on Treasuries here.
In addition to the above, we think the US corporate tax payment deadline of 15 September could provide the dollar with some support this week. Seasonally, the dollar does OK in September, and we note that the Fed’s overnight SOFR rate is already edging up to the top of its range (now 4.41%) as short-term liquidity conditions temporarily tighten. We suspect that the DXY could be driven a little higher this week, before a bearish switch into next Wednesday’s FOMC meeting.
That could mean DXY has another run at 98.50 this week.
Chris Turner
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