US Dollar: Payrolls-driven consolidation as CPI looms – TD Securities

TD Securities strategists note that the US Dollar (USD) weakened after the disappointing July Payrolls report, but see limited downside against G10 currencies unless softer US inflation further reduces Fed hike expectations. They say EUR/USD may struggle to break above 1.16 without a benign CPI print, while USD losses could extend further against select EM currencies. They continue to expect the Fed to keep rates unchanged through 2026 and 2027.

Dollar softer but still supported

"Markets bull steepened on the negative headline print despite a drop in the UE rate to 4.1%. The print eased concerns over a reaccelerating labor market, leading to markets pricing out hikes, with September's pricing declining by 3bp to 12bp of hikes."

"While the risk of a hike lingers, our expectations for core and headline CPI next week (0.20% m/m and 0.15% m/m, respectively) would likely lead to further pricing out of hikes. With the majority of the recent move higher in rates driven by Fed expectations, rates could move lower as hikes are priced out."

"While we continue to expect the Fed to keep rates on hold for 2026 and 2027, September pricing could remain substantial as the Fed will continue to look at data to make a decision in the months ahead."

"Without a removal of near-term Fed rate hike pricing, the USD's cumulative return in US trading hours is unlikely to dip to negative territory, in our view. Specifically for EUR/USD, the bar for an upside breakout above 1.16 without soft US CPI data remains high."

"The USD was broadly lower on the back of the US payrolls miss. We believe the USD should stay more supported vs G10 currencies but USD selloff could have more room to run against select EM currencies."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)