The dollar is not falling through the floor. But the floorboards are beginning to creak.
Takeaways
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Friday’s payroll miss put the first real crack in the dollar’s rate-support story.
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CPI is the next hinge. A soft print does not need to scream Fed easing; it just needs to make another hike look increasingly unnecessary.
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There is still hawkish premium embedded in the US curve, which leaves room for further dollar downside if the data keep cooling.
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remains the messy expression: softer US yields help the yen, but carry demand and rebuilt shorts keep pulling traders back toward the 160 danger zone.
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is still mostly a dollar trade. A move through 1.160 would reflect fading US rate support more than any sudden euro love affair.
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The key FX shift is simple: the dollar does not need a dovish Fed to weaken. It only needs the market to stop believing in a hawkish one.
The Dollar Has Lost Some of Its Armour
The dollar walked into August wearing the same suit of armour that had protected it for most of the year: a US economy that refused to buckle, a Fed still unwilling to declare the inflation fight over, and a Treasury market that kept threatening to do some of the tightening on Powell’s behalf. Friday’s payroll report finally put a meaningful dent in that armour, and this week’s CPI now gets the next swing.
The jobs report was weak enough to change the conversation without necessarily screaming recession. The broader labour trend is losing altitude, revisions have taken some of the shine off previous months, and the improvement in unemployment came with enough caveats to make another a much tougher sell.
That is where the FX story gets interesting.
ING’s Francesco Pesole frames the period into the September FOMC as a sequence of major tests for the Fed outlook, with payrolls providing the first meaningful dovish signal and the next. I would not get too hung up on the scoreboard itself, but the underlying logic is sound: if the incoming data continue to chip away at the case for further tightening, there is still room for US rate expectations to reprice lower.
At the start of August, our call for no Federal Reserve hikes this year was set to face five major tests before the 16 September FOMC: two jobs reports, two CPI reports and Jackson Hole. Our feeling was that if those events failed to trigger a dovish shift in market expectations, pricing a September hike above 50% could itself have materially increased the risk of a hike, if only to avoid another bond sell-off on meeting day. ING
The first test arrived on Friday and came through clearly dovish and dollar-negative
And the dollar does not need the Fed to start cutting to feel the pressure.
It simply needs the market to stop believing another hike is sitting around the corner.
That distinction matters because the dollar has spent much of this cycle feeding directly from the front end of the Treasury curve. Every time the market rediscovered the possibility of another tightening move, the greenback found another gust of wind. Friday took some of that protection away.
Now gets the next chance to strip off another layer.
ING expects a softer headline CPI outcome than consensus, and if that is broadly the direction of travel, it would reinforce the idea that the Fed can sit on its hands rather than reach for another hike. That would leave further room for hawkish premium to be squeezed out of the US curve and, by extension, keep the broader balance of risks tilted against the dollar.
The yen should theoretically be one of the cleaner beneficiaries, although USD/JPY has never been interested in making life easy.
On paper, softer US yields, intervention risk and a Bank of Japan edging toward another hike should all lean in favour of the yen. In practice, the market continues to rebuild yen shorts almost as quickly as Tokyo can flush them out.
USD/JPY is already back around 158.30 to 158.50, and that tells you how powerful the carry instinct remains.
Pesole also makes the useful point that intervention risk and growing confidence around another BoJ move have so far struggled to kill that rebuilding process. I think that is exactly right. The yen has the macro argument increasingly moving in its favour, but the carry machine is still running hot enough to drag USD/JPY back toward uncomfortable territory.
A push toward 160.00 remains entirely plausible if the intervention scar tissue keeps fading.
But the higher USD/JPY goes, the less attractive the asymmetry becomes. Tokyo has already shown its hand; the BoJ is moving gradually in the other direction, and another weak US data print could hit a rebuilt carry position quickly.
“So, correctly or incorrectly, I’m now positioned for the softer-dollar dominoes to fall — CPI gets the next push.” Dark Side of the Boom
EUR/USD is the cleaner expression.
Europe itself is not giving traders much to chew on, so this remains largely a dollar-side trade. ING sees scope for a break above 1.1600 if US CPI comes in soft, and that fits comfortably with the broader rates picture.
“But 50 pips on a trade doesn’t square the circle for me. I’m looking at the technical picture beyond “: Dark Side of the Boom
Above 1.1600, 1.1630 is the next technical gate, with 1.1650 the more meaningful stretch level if the US front end continues to soften.
I would not dress that up as a great Euro Renaissance. EUR/USD does not need Europe to become exciting. It simply needs the US rate advantage to lose some altitude.
That is really the broader message heading into CPI.
Friday weakened the argument for another Fed hike. A benign inflation print would weaken it further. The dollar still has enough rate support beneath it to prevent any easy collapse, but the market is beginning to remove some of the scaffolding that held the greenback up through the earlier part of the year.
The dollar is not falling through the floor.
But the floorboards are beginning to creak.
