FX Daily: Dollar Finds Support Amid Political Uncertainty and Tax Flows
Recent US jobs data, described as “soft” following the August release, briefly spurred speculation of a potential 50 basis point rate cut by the Federal Reserve, mirroring last September’s action. This initially triggered a 0.5% decline in the dollar, though much of this movement has since been recovered. Political developments overseas are believed to be a key factor limiting further dollar weakness.France is currently facing a confidence vote on its proposed 2026 budget, with the government expected to fall.Together, the resignation of Japanese Prime Minister Shigeru Ishiba has heightened concerns in the bond market regarding potential looser fiscal policy. Japan will hold a Liberal Democratic Party (LDP) leadership election on October 4th, with attention focused on candidates like Sanae takaichi and their platforms of fiscal expansion and potentially slower monetary policy normalization. the USD/JPY exchange rate has already reacted, gapping above 148, reflecting increased market sensitivity to fiscal risks. however,further gains may be limited,potentially stalling in the 148.50/149.00 range rather than breaching 150, though the political situation may delay a previously anticipated drop towards 145 by the end of September.
Several US economic releases this week will influence the dollar’s trajectory. Tomorrow’s preliminary annual benchmark revision to the 2025 nonfarm payrolls report is expected to fall between -500,000 and 800,000. Federal Reserve official Christopher Waller recently suggested a revision around -720,000. A meaningful downward revision could lead to some dollar weakness. Market expectations currently point towards a 150 basis point easing cycle by next summer, bringing the policy rate to 3.00%.
Thursday’s August CPI release also carries weight, with risks skewed towards a 0.4% month-on-month increase (compared to a consensus of 0.3%), potentially providing temporary support for the dollar. This could also negatively impact Treasuries, which face $119 billion in auctions of 3, 10, and 30-year bonds this week; further analysis on the Treasury market is available here.
Adding to potential dollar strength, the US corporate tax payment deadline on September 15th, combined with the dollar’s seasonal performance in September, and a tightening of short-term liquidity – evidenced by the Fed’s overnight SOFR rate edging up to 4.41% – could provide further support. As a result, the DXY index is expected to potentially test 98.50 this week, before a likely shift towards bearish sentiment ahead of next Wednesday’s FOMC meeting.
– Chris Turner
