USD Under Some Pressure Ahead Of Critical NFP

As August comes to an end, and markets get prepared for September, historically the worst month for some financial assets, the US dollar is under some pressure at month end and ahead of the critical US Non Farm Payrolls data, but globally speaking, the focus is still on the expectations of recession and inflationary pressures.

The US Dollar Index has come under pressure on Wednesday in midday trade as traders count down to this week’s US Nonfarm Payrolls data, to be released on Friday.

The NFP data could reinforce the logic for a 75bp rate hike by the Fed in FOMC’s September meeting. The dollar is actually hovering around the 2-decade high hit on Monday.

The Dollar Index, which measures the greenback against a basket of six currencies, was last down 0.1% at 108.66, after earlier touching Monday’s two-decade peak of 109.48.

The Dollar Index is on track for a rise of around 2.6% in August, its third-straight monthly gain. Hot inflation is triggering additional recession-related fears harassing financial markets on Wednesday which is serving as a bullish push for the US dollar and US Treasury yields.

The two-year US Treasury yield, which is relatively more sensitive to the monetary policy outlook in the US, hit a 15-year high at 3.499% overnight but eased back to 3.446%. The 10-year Treasury yield, which hit a two-month high of 3.153% on Tuesday, stood at 3.123, easing back from 3.164%.

Traders are now pricing in the 70% probability of a 75 basis points Fed rate hike next month following hawkish remarks and comments by Fed officials who announced again their support for further rate hikes.

New York Fed President John Williams said, Tuesday, that inflation expectations in the US are not frightening, but Williams noted that it would take a few years to bring inflation back to the 2% target.

Richmond Federal Reserve Bank President Thomas Barkin said on Tuesday that the US is facing “post-war-like” inflation. The remarks made by officials have followed the comments from Fed Chair Jerome Powell before the Jackson Hole central banking symposium last week that left the door wide open for ongoing rate hikes into mid-2023, which prompted a wave of US dollar strength.

Economic news is still dim with overnight data showing declining economic activity in China after new COVID-19 infections, the worst heatwaves in decades and struggles in the property sector.

China’s PMI survey data for August triggered factory activity contraction. The data is leading some analysts to believe the world’s second-largest economy will likely dip below 3.0% in Q3.