Yesterday’s US data releases certainly can be filed in the ‘soft landing’ drawer. Decent growth and benign inflation support the thesis that the Federal Reserve can make monetary policy less restrictive in an orderly manner and that, if the US economy does experience a recession, it will be a mild one. Equity markets seem happy to hold onto gains. The dollar does not know quite what to make of it. On the one hand, the mildly pro-risk sentiment should be a mild dollar negative. Yet, decent US growth plus rates falling faster in Europe than in the US are keeping the dollar mildly bid.
We doubt this challenge gets resolved in the short term, even though today’s US Core PCE deflator should again come in at a very well behaved 0.2% month-on-month, 2.0% year-on-year and point to – as our US economist James Knightley puts it – the Fed’s job being done. Given our view on a less-than-dovish FOMC meeting next week and potential market noise around Monday’s announcement of the US Quarterly Refunding, we suspect DXY can hold support levels near 103.00 and could nudge up towards the 104.00/25 area early next week.