USD: Spanner in the works – Commerzbank

The US labor market report for July has thrown a spanner in the works, dashing my speculation that the Fed might not cut interest rates in September after all. Now it looks more likely than ever. Between now and the next Fed meeting on September 17, there is still one labor market report and two inflation reports to come. Of course, anything can happen – especially on the inflation front if the tariffs finally come into force this week. However, it is unlikely that the next labor market report will be surprisingly good, and it is also doubtful that the tariffs will have a significant impact on inflation so soon after they come into force. This would make the arguments in favor of an interest rate cut in September overwhelming, Commerzbank's FX analyst Antje Praefcke notes.

Downside risks for the dollar clearly dominate at present

"To make matters worse, US President Trump continues to massively erode confidence in the decisions of the US administration. If a labor market figure doesn't fit, the head of the BLS is simply fired. Of course, one can always argue about the collection, analysis, and interpretation of data. But such actions tend to smack of “if it doesn't fit, make it fit” and further undermine the credibility of statistics and data sets. I would just like to recall similar incidents in Turkey in the past."

"In addition, the personnel changes in the Board of Governors could now shift more quickly in favor of a more dovish Fed, in line with Trump's demands, after Ms. Kugler announced her early retirement. One more vote on the board does not necessarily mean an immediate interest rate cut, as there are a total of seven board members and five regional central bank presidents who are eligible to vote. Nevertheless, with the nomination of a suitably loyal candidate – especially in view of the latest labor market data, see above – the Fed is likely to become more inclined to cut interest rates. Or there could be internal power struggles within the FOMC, which the market would certainly view critically."

"All in all, therefore, these are not good news but rather bitter pills for the dollar, especially if other macroeconomic data also deteriorates noticeably and the arguments in favor of interest rate cuts become stronger. The only hope for a possible correction then remains the US stock markets. If they collapse, Trump could take countermeasures to calm investors' heated tempers, at least partially and for a short time. However, the downside risks for the dollar clearly dominate at present."