USD: The really big chunks are yet to come – Commerzbank

The US ISM manufacturing index was good for a few short-term pips, but it failed to give the dollar a real blow yesterday. This is hardly surprising. On the one hand, the ISM index has remained below the 50 mark for six months, at the same time showing a slight upward trend without really getting off the ground. The sub-component for new orders was surprisingly good, while the employment component remains weak, but improved marginally compared to the previous month. All in all, the index for August was neither fish nor fowl. There was something for everyone, but the index is generally not very meaningful for the real economy and was therefore only good for a short, quickly corrected dip in the USD, Commerzbank's FX analyst Antje Praefcke notes.

Market is likely to turn its attention back to other important issues

"However, the really important data is still on the agenda: tomorrow the ADP index (which, despite its lack of correlation, is often taken as a leading indicator for the NFP) and then, of course, the labor market report on Friday. Precisely because Fed Chairman Jerome Powell emphasized the downside risks to the economy and employment in his speech in Jackson Hole in order to strike a balance between expectations of interest rate cuts (by the US government, the market, and his own FOMC colleagues) and inflation risks that may result from tariffs, the labor market data is now even more in focus than usual. So, really big chunks this time."

"The US Dollar is clearly the mover at the moment, showing more volatility. And that also means, of course, that disappointing labor market data could give the Fed's interest rate cut expectations another significant boost, possibly back in the direction of one or more 50 basis point moves. In this case, I would expect the dollar to be punished heavily once again. The ADP index could lay the groundwork for this tomorrow in terms of sentiment with a weaker-than-expected figure (consensus 80,000), although the index ultimately has no meaning for Friday's figure."

"However, if the data remains roughly in line with market expectations with marginal deviations, my assessment would be that, with the expectation of just under two interest rate cuts by the end of the year, which is also the forecast of our economists, the dollar may still take a hit, but ultimately sufficient weakness is already priced into the currency. This means that, although I expect the usual back-and-forth movement in the USD when the data is released in line with consensus expectations, I do not expect any additional dollar weakness. So, in the end, it's going to be again neither fish nor fowl. The market is likely to quickly turn its attention back to other important issues, including the US budget, as another shutdown looms at the end of the month."