Dovish Fed bets pummel dollar, boost gold ahead of NFP

Waller dents September rate hike bets

Expectations for a September Fed rate hike suffered a fresh setback on Thursday after Governor Christopher Waller said he was “inclined” to keep rates unchanged at the meeting. Although Waller did indicate he would consider raising rates if September CPI “comes in hot”, he put the emphasis on disinflation.

Unlike Kevin Warsh who sounded the inflation alarm at the Jackson Hole symposium, Waller appeared to contrast the Fed chair, telling investors to “give disinflation a chance”, taking inspiration from John Lennon. Treasury yields plunged after the remarks, particularly the two-year yield, which is the most sensitive to short-term interest-rate expectations.

Investors subsequently scaled back their bets of a 25-basis-point increase in the Fed funds rate in just under two weeks’ time to about 50%, down from almost 70% at the start of the week.

Yen leads bounce back against sliding dollar

With a September hike now looking like a coin toss, the US dollar slid across the board on Thursday, especially against the soaring yen. The Japanese currency is headed for its best weekly jump since the end of July when the US and Japan jointly intervened, gaining 2.3%.

The dollar has steadied during European trading, edging up to around 156.70 yen from an overnight low of 155.27 yen. The euro is flat around $1.1619, up just 0.3% for the week despite steadily rising rate hike expectations for the ECB.

European gas futures hit their highest since January 2023 this week amid the continued disruption of supplies from the Gulf, fuelling inflation worries for European nations reliant on natural gas for electricity.

The ECB is almost certain to hike rates next week and the Bank of Japan is widely expected to do the same a week later.

Bank of England tightening expectations have also gained some traction, with a November hike looking more certain following hawkish remarks yesterday by the Bank’s chief economist, Huw Pill.

The pound is slightly higher today at $1.3532.

Gold and dollar brace for NFP shocks

Investors are now firmly focused on the August payrolls numbers out of the US due at 12:30 GMT. After the surprise job losses in July, analysts are forecasting a rebound of 56k jobs in August. The unemployment rate is expected to hold steady at 4.1%.

A third straight month of negative surprise could wipe out bets of a September hike, especially if it’s another negative print. However, a strong jobs report would provide the boost the hawks at the Fed are probably hoping for.

Yesterday’s upbeat ISM services PMI eased any fears of a slowing economy, although the employment sub-index notably remained below 50.

While a hot NFP report would help the dollar get back on the front foot, gold’s latest advance would be curtailed. The precious metal is once again testing the $4,500 level, but having rebounded from the week’s lows, the next direction will likely be determined by the upcoming jobs data.

Bitcoin and Wall Street buoyed by dovish Fed

Bitcoin is also headed for weekly gains, surging 5.3% to above $81,000 on Thursday on hopes that the US Senate will hold a procedural vote on the Clarity Act on September 15.

Equities are mixed on Friday despite a strong close on Wall Street yesterday, as traders await the payrolls numbers.

The S&P 500 rallied 1.4% and the Nasdaq 100 rose 1.2%, lifted by major gains in tech stocks. Space X skyrocketed by 6.4% on analyst upgrades and Tesla and Meta were also big gainers. Nvidia was another outperformer, enjoying an impressive two-day rally, eyeing fresh record highs.

Other chipmakers haven’t been faring as well but this renewed optimism in certain tech and AI stocks is somewhat questionable given the latest escalation in the Middle East, even if a Fed rate hike is delayed for now.

Oil prices reflect heightened Mideast tensions

US Vice President JD Vance yesterday attempted to play down the hostilities, arguing that they do not amount to war and that major combat operations haven’t been ongoing in “a very long time”.

In the meantime, Iran carried out fresh strikes on American targets in Kuwait in retaliation to the US attacks.

Oil prices look set to end the week more than 6% higher, though the bounce appears to be stalling, with WTI trading around $90 a barrel and Brent Crude at $95.