Will US Durable Goods Knock Down King Dollar? Hs

The dollar is at near two-month highs, while gold is under pressure ahead of a key data release. The question for traders is wether Friday’s US Durable Goods Orders figures will be the catalyst the market seems to be looking for to weaken the dollar a bit. Whether it’s just a correction before the dollar moves higher or the start of a reversal is also an important factor to consider.

The dollar index rose to 101.1 after stronger-than-expected manufacturing data earlier in the week and a softer Treasury auction that pushed the 10-year yield to the highest its been in nearly two decades. The Euro slipped against the dollar, falling to two-month lows while cable fell to near three-month lows.

What’s Driving the Dollar Price Action

The gains in the dollar are supported by increased odds of a rate hike at the next meeting. Just a week ago, put the odds that the FOMC would raise rates in October at around 50%. Since then, the ods of have risen to nearly 70% amid rising inflation fears.

One of the factors that investors are likely taking into consideration is the productivity-demand delta. That is, whether the economy is growing fast enough to keep up with rising prices. If productivity remains constrained while consumer confidence remains in expansion, then there will likely be upward pressure on inflation. The Fed justified its recent hike in part on the economy continuing to grow and that interest rates were not restrictive. So, a poor reading in a productivity indictor like durable goods could alter the odds of a rate hike.

What the Market Is Looking For

The consensus among analysts is that US durable goods will see a pullback in August after a solid beat in July. Headline durable goods are projected at -0.4% compared to +1.1% a month earlier.

The series is notoriously volatile, particularly given the irregularity of aircraft and defense orders, so the core reading often takes precedence. Durable goods excluding defesne and air are projected to stay flat, repeating the prior month’s reading.

How Durable Good Could Affect the Markets

Traders are expecting core durable goods to remain positive or at least minimally negative to continue to justify a rate hike. The Fed’s main tool for controlling inflation is to raise rates and slow an overheated economy, so signs of slowing growth would mean the Fed has less reason to hike. Softer than expected results would raise questions about the resilience of the US economy, and could weigh on the greenback. While this might help the pound and the Euro to recover some of the ground lost over the last couple of weeks, commodity currencies like the AUD and NZD are also sensitive to growth expectations.

On the other hand, a better-than-expected reading would reinforce the argument for not just an earlier rate hike, but further tightening after that. This would likely boost the dollar, weighing on the USDJPY, EURUSD and GBPUSD. Commodity currencies might have some initial gains on the basis of a growing economy and demand, but could see those gains limited by an increased Fed hike expectations.