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US Dollar Dogged by Sinking Fed Hike Expectations

US Dollar Dogged by Sinking Fed Hike Expectations

Christopher Vecchio, CFA,

Talking Points:

- US Dollar collapsed yesterday after terrible US ISM Services report.

- Fed funds now pricing in a 24% chance of a rate hike in September.

- As market volatility is set to rise with summer ending, it's a good time to review risk management principles.

Federal Reserve officials can talk tough all they want, but a look at the fact clears up any confusion about what's going on in the US economy. Recent evidence points to the FOMC keeping rates on hold on September, desperate for US economic data to stabilize to get a ceremonial, face-saving rate hike in by December.

Where do we stand? The August ISM Services index plunged to its lowest level in over six years, falling at its fastest pace since November 2008 - right after Lehman Brothers collapsed. US jobs growth remains uneven, with wage growth frustratingly low and few signs of inflation pressure in either the CPI or PCE readings.

Chart 1: US Yield Curve (2s10s) - September 9, 2015 versus September 7, 2016

Overall, the trend has been getting worse over the last few weeks. On July 26, the Citi Economic Surprise Index for the US was at +43.1; today it stands at -7.0. A market gauge of economic activity - the US yield curve slope, as measured by the difference between the 2-year and 10-year yields (the 2s10s spread) - hints at rising recession risk. The 2s10s spread is now only 79.8-bps, down from 141.6-bps a year ago.

All of these facts have led market participants to believe that the odds of a Fed rate hike this month are fading: there's a 24% chance of a hike in September, down from 34% after the August NFP report.

See the above video for a technical review of the USDOLLAR Index, EUR/USD, GBP/USD, AUD/USD, USD/JPY, and USD/CAD.

Read more: USD/JPY Tanks as ISM Misses by Most Since November 2008

--- Written by Christopher Vecchio, Currency Strategist

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.