US Dollar Outlook Mired by Growing Bets for October Fed Rate Cut

US Dollar Rate Talking Points

Fresh data prints coming out of the US economy may produce headwinds for the Dollar as fears of a looming recession puts pressure on the Federal Reserve to implement lower interest rates.

Fundamental Forecast for US Dollar: Bearish

The US Dollar extends the decline from earlier this month as the Retail Sales report shows an unexpected decline in September, with household spending contracting 0.3% after climbing a revised 0.6% in August.

Updates to the Durable Goods Orders report may spark a similar reaction as demand for large-ticket items are projected to fall 0.6% in September, while Non-Defense Capital Goods Orders excluding Aircrafts, a proxy for business investments, are anticipated to decline 0.1% during the same period after contracting 0.6% the month prior.

Signs of slowing consumption may become a growing concern for the Federal Open Market Committee (FOMC) as private-sector spending “has been the key driver of growth,” and the central bank may continue to embark on its rate easing cycle as “weakness in global growth and trade policy uncertainty haveweighed on the economy and pose ongoing risks.”

In fact, Fed Fund futures now reflect a greater than 80% probability for another 25bp reduction on October 30 as Chairman Jerome Powell and Co. see the benchmark interest rate around 1.50% to 1.75% ahead of 2020.

In remains to be seen if the FOMC will continue to reverse the four rate hikes from 2018 as President Donald Trump announces “phase one” of the US-China trade deal, but the Fed may have little choice but to respond to the slowdown in household consumption amid fears of a looming recession.

As a result, another batch of dismal US data prints may lead to a further depreciation in the US Dollar as it fuels bets for another Fed rate cut.

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.