US Dollar Little Fazed by Core PCE; Focus on Jobs & Sentiment

US DOLLAR OUTLOOK: EMPLOYMENT DATA, RISK TRENDS OVERSHADOW INFLATION

• US Dollar is fairly mixed across the board of major currency pairs headed into month-end
• The DXY Index is little changed on the session as recent selling pressure starts to subside
• Core PCE inflation data largely overlooked with the Fed and markets focused on jobs, risk

The US Dollar is attempting to firm up a bit with the broader DXY Index pacing a 0.12% gain. This follows a sharp slide lower earlier in the week that leaves the US Dollar down about -1% from last Friday’s close. Core PCE data – the Federal Reserve’s preferred gauge of inflation – was just released and could be contributing to some US Dollar strength.

This is considering core PCE inflation continues to head higher and hovers at levels last seen in nearly three decades. That arguably keeps the pressure on Fed officials to deliver a timeline for tapering asset purchases and reigning in uber-accommodative monetary policy. To be fair, though, the latest readings on core PCE did cross market wires below consensus forecast. The DailyFX Economic Calendar details year-over-year core PCE came in at 3.5% versus 3.7% expected.

DXY INDEX – US DOLLAR PRICE CHART: DAILY TIME FRAME (17 FEB TO 30 JUL 2021)

Chart by @RichDvorakFX created using TradingView

Likewise, in light of updated guidance from FOMC Chair Powell earlier this week, markets might pay more attention to other drivers outside of inflation that are likely to weigh on Fed policy.After all, recent inflationary pressures are not only expected and largely explained away by base effects and supply chain disruptions, but the Fed also has the tolerance for inflation to overshoot its 2% target in the medium term following the strategic shift to average inflation targeting (AIT) last year.

This brings to focus how substantial further progress is still needed on fulfilling the Fed’s maximum employment mandate, which stands to overshadow its price stability mandate. As such, labor market data – like jobless claims, nonfarm payrolls, the unemployment rate – have potential to influence the direction of the US Dollar more than inflation.

A miss on NFPs due next Friday, 06 August at 12:30 GMT, for example, could thus provide the Fed with enough ammunition to drag its feet on tapering policy, and reignite downward pressure on the US Dollar in turn. Gyrations in market sentiment and appetite for risk also has potential to weigh on the US Dollar demand given its posturing as a safe-haven currency. This might warrant keeping close tabs on the S&P 500-derived VIX Index as a sharp spike higher in the fear-gauge may see the US Dollar follow in lockstep.

Keep Reading – US Dollar Hits Monthly Low as Jobless Claims, Q2 GDP Disappoint

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight