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US Dollar Fundamental Forecast: Neutral

• FOMC week sees US dollar lose luster as Fed clams taper talks.
• Eventful week closed out with a better/worse-than-expected PCE print.
• US non-farm payrolls on Friday may be the next US dollar event driver.

The US dollar took a hit after last week’s Federal Reserve interest rate decision. Fed Chair Jerome Powell hedged perceivable hawkish undertones by stating that long-term inflation expectations and indicators look to be in line with the central bank’s long-term goal of 2%. Markets took this language in stride, with a risk-on tilt given to equities and other risk assets, to the US dollar’s detriment.

Some viewed the sharp run higher in prices as a possible signal that the Fed would take a more hawkish approach and concede that discussions on tapering the balance sheet have begun or will begin soon. Inflation measures, as well as short-term expectations, have trended higher as the economic recovery gains steam. That sent the US dollar DXY index to fresh multi-month highs preceding the July rate decision.

The greenback via the DXY index remained lower on the week following June’s PCE figures crossing the wires on Friday. The core PCE index, which strips out volatile food and energy prices, crossed the wires at 3.5%, missing expectations of 3.7% and up from May’s 3.4% figure. While this keeps the transitory narrative at bay for the time being -- given prices remain well above the 2% target -- the next FOMC meeting isn’t until late September.

That likely leaves the calculus over policy expectations largely unchanged and instead will have traders looking forward to other high-impact events further down the road. That said, the non-farm payrolls report for July will serve as the next potentially eventful economic print. Analysts expect the figure to cross the wires at 925 thousand, up from June’s 850 thousand figure. A better-than-expected print may rekindle some upside energy for the US dollar.

US Dollar and PCE Price Index