DXY Flat in Summer-thinned Trade as US CPI Looms; AUD/USD Drops 0.4% as Global Equities Falter

Key Points

• The DXY was flat in summer-thinned trade on Tuesday after reversing intra-day losses ahead of Wednesday’s US CPI release.
• Analysts think an upside surprise could boost the buck as traders up their Fed tightening bets.
• The Aussie, kiwi and loonie underperformed on Tuesday in tandem with downside in global equities.

DXY Flat in Summer-thinned Trade as Investors Await US CPI

The US dollar reversed early losses on Tuesday in indecisive summer-thinned trade as investors digested data showing that US labor productivity dipped substantially but wages picked up more than expected in Q2, ahead of the highly anticipated release of US Consumer Price Index figures for July on Wednesday. The US Dollar Index (DXY), a trade-weighted basket of USD-major forex pairs, was last changing hands nearly flat on the day in the 106.30s, up from a brief dip back below 106.00 earlier in the day.

Data released on Tuesday showed US Nonfarm Productivity sliding 4.6% QoQ in Q2, roughly in line with expectations, while Unit Labor Costs surged 10.8% QoQ, above the expected gain of 9.5%, although lower than Q1’s 12.7% QoQ gain. Analysts said the data highlighted the fact that the US labor market remains tight and inflation concerns high. Rising wages can feed into higher consumer price inflation.

Traders were last pricing about a 70% chance that the Fed lifts interest rates by 75 bps for a third time in a row in September. Recent stronger than expected data (ISM PMI surveys and the US jobs report last week, plus this week’s data) and hawkish commentary from Fed policymakers has seen markets pare back on dovish bets made in late July that the Fed might slow the pace of tightening given a weakening economy.

Analysts said that traders could price in an even higher likelihood of a 75 bps rate hike in September if Wednesday’s US inflation figures print to the upside of expectations, which could be supportive for the buck.

Risk-sensitive G10 Currencies Underperform

A more downbeat tone to global equity market sentiment on Tuesday due to a second downbeat revenue forecast from a major US chipmaker in as many days weighed on the more risk-sensitive G10 currencies like the Aussie, kiwi and loonie. The former was an underperformer despite an improvement in July NAB Business survey data released during the Asia Pacific session.

The euro managed to edge slightly higher on-the-day versus the buck, but EUR/USD remains well within recent ranges. GBP/USD was unenthused by commentary from BoE Deputy Governor Dave Ramsden, who said the bank would likely have to lift interest rates further from current levels with its inflation fight not yet won. Traders are reluctant to buy sterling following last week’s gloomy UK economic outlook outlined by the BoE in its latest monetary policy report.

Tuesday’s hotter-than-forecast Q2 labor cost growth figures saw US yields rally (2s +7bps, 10s +4bps) which helped push USD/JPY modestly higher intra-day, though the pair remains well within weekly ranges. Aside from upcoming US CPI data out on Wednesday, investors will also be monitoring the release of Chinese CPI figures during Asia Pacific trade, commentary from BoE policymaker Huw Pill.