Next week will be huge for the dollar: Treasury Refunding Statement, BOJ and Fed Decisions

• Fed expected to keep rates on hold despite robust US GDP/personal consumption/spending data
• Monthly pace of core inflation ticked higher
• October’s PCE reading however is expected to cool towards 3.2%

Any chance of a dovish hold by the Fed went out the window after core PCE posted its largest gain in four months.  Despite another round of robust US economic data (spending and PCE deflator), Treasury yields remain anchored as the Middle East conflict widens.  In response to attacks made on US forces, US fighter jets targeted Iran-linked sites in Syria. The Nasdaq is higher after impressive earnings from Amazon, which showed their cloud business is headed in the right direction. Amazon’s strong earnings come alongside cost-cutting measures that have been in place over the past year. ​ The key for mega-cap tech is to have strong cloud-unit sales and Amazon was able to deliver. ​

The US dollar is wavering and US stocks are trying to finish the week on a positive note, but investors might hesitate ahead of next week’s fireworks.  The global bond market could see intense volatility given a hot Tokyo CPI might pressure the BOJ to tweak policy and after US core PCE accelerated which will force the Fed to stay on guard. Given the chaos that ensued after the last refunding statement, Wednesday’s Treasury release of their near-term plans for note and bond sales could be the trigger that lets yields either surge or plunge below the 5.00% level.

US Data

The US economy is still looking rather healthy.  September data confirmed what everyone on Wall Street knows…. The economy peaked at the end of the third quarter.  Americans posted robust spending numbers in September, a monthly gain of 0.7%, but that coincided with the personal saving rate falling to the lowest level since March 2022.  The labor market appears poised to soften as jobless claims head higher and as companies will be facing unfavorable borrowing terms next year. Personal incomes also rose at a softer pace, which eventually will lead to softer spending habits.

Much attention fell on the Fed’s preferred inflation, core PCE deflator which saw a hefty monthly increase of 0.3%. The US economic resilient story was always going to complicate the disinflation process, as robust demand will be supportive for pricing pressures.  Despite the small upside surprise with the PCE deflator, expectations are still strong for inflation to continue to soften in October.

EUR/USD and USD/JPY daily chart

Next week will be huge for the dollar, which should trigger price action that extends beyond this week’s trading ranges for both EUR/USD and USD/JPY.

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