The US Dollar is correcting lower into the end of the week as traders brace for a slew of key US econ readings latest today. Yesterday. Final Q2 US GDP was seen coming in at 2.1%, as previously recorded. However, the market had expected a slight revision higher to 2.2%. The reaction in USD shows that the bar is now set quite high for bulls. With the Fed signalling that rates are likely to stay higher for longer, in line with the resilience shown by the US economy, traders are looking for fresh signals to support this narrative. As such, any data points which don’t exceed market forecasts are likely to result in a weaker USD.

US Data on Deck

Looking ahead today, traders will be focusing on core PCE as well as revised UoM consumer sentiment data. Rate hike expectations for November/December have surged higher in recent weeks with the Fed confirming at the September FOMC that one further hike is expected this cycle.

Fed Uncertainty

Given the uptick in inflation and the fresh rise in energy prices, traders are now wary of rates being kept at higher levels for longer than expected meaning USD will likely remain supported through year end unless inflation starts to fall back. Indeed, there are some in the Fed, such as Barkin who commented yesterday, who are still uncertain over whether further tightening is needed. Therefore, any softening of data will likely feed this uncertainty, causing USD to pull back.

DXY

The rally in the index has stalled for now ahead of the 107.57 level. Momentum studies are fading, suggesting room for a deeper correction. However, while the 104.95 level holds as support, the focus remains on a further push higher and a challenge of the 107.57 level next with 109.13 above as a longer-run target. 

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