The latest batch of US data has sent contrasting signals to the Federal Reserve and to the markets. In other circumstances, there would have been a US Dollar (USD) rally, but there are at least two sets of factors that have capped the FX reaction, ING’s FX strategist Francesco Pesole notes.

DXY may reach 103.50 in the near term

“The surprise rise in jobless claims might be due to extreme weather events but had a noticeable negative impact on the dollar. The room for further dovish repricing is limited. The link between rates/data and the dollar to soften into the US election. Yesterday’s moves seem to endorse such dynamics, and with market pricing for the Fed now likely to prove sticky on both sides, we’ll be monitoring more closely the external environment rather than US data like today’s PPI.”

“Oil volatility remains central. Crude prices are facing some large daily swings while awaiting Israel’s retaliation against Iran, which could lead to disruptions in supply. Israel's defence minister said the nation’s next move will be ‘above all surprising’, and Iran has already pledged to strike back should it be attacked, which is probably contributing to the uncertainty and the general sense it will take some time for tensions to de-escalate.”

“Another non-US development to follow is tomorrow’s announcement of new stimulus measures in China. The consensus for the size of the package is around 2tn yuan, but the market reaction will probably depend more on the targets of extra spending, with any boosts to consumption probably being favoured. Even in the case of a positive reaction, we are not sure markets are ready to take USD/CNY below 7.0 before the US election. Ultimately, the negative impact on the dollar may be contained. A strengthening into 103.50 in DXY remains possible in the near term.”