Bullish Consumers Could Wrong-Foot US Dollar Bears

Stronger-than-forecast economic data has halted the fall in the Dollar and prompted some to expect that the Federal Reserve remains on the front-foot; something those betting against the Dollar might not fully appreciate.

A strengthening US economy, borne out by fresh economic data, could mean the market has been wrong to doubt the likely pace of Federal Reserve rate hikes and the central bank’s resolve to begin unwinding its balance sheet.

The Conference Board reports their measure of consumer confidence rose to a near 17 year high in August, surpassing expectations for the third month running, as household optimism remained solid even in the face of concerns over whether the Trump administration will be able to deliver on its agenda.

With the U.S. economy apparently picking up pace into year-end, there is a risk that those intent on betting on further Dollar weakness are wrong-footed.

The consumer confidence report appears to have called a halt to the rout that began across US Dollar currency pairs, with the Dollar index rising from 91.75 to a high of 92.48 during the course of the afternoon.

It remained close to this level well into the Wednesday session.

The Pound to Dollar exchange rate also weakened notably, falling close to 50 points between noon Tuesday and mid morning Wednesday when bids and offers were accepted around the 1.2914 level.

The Euro to Dollar exchange rate also pulled back from its recent high, after topping 1.2060 Tuesday, it traded down at 1.1944 Wednesday morning.

"The intraday recovery in the greenback caught many investors by surprise," says Kathy Lien, Director at BK Asset Management in New York. "Outside of a stronger-than-expected U.S. consumer confidence report, there is very little for investors to be buying Dollars."

Others disagree though, saying the Federal Reserve will in fact deliver the kind of interest rate rises required to spark a more sustained recovery in the Dollar; something that markets are yet to fully realise.

“The yield of the benchmark 10-year Treasury note briefly dipped below 2.10% in early US trading. It closed at 2.13%, however, after a series of strong economic data reminded traders and investors that the Fed is on course to shrinking its balance sheet and lifting rates again,” says Markus Allenspach, head of fixed income research at Swiss wealth manager, Julius Baer.

One of the key contingents to further tightening ever since the Fed first began to hike has been the outlook for wage growth in the US, but recent economic numbers have begun to point toward a likely improvement in pay packets.

“Particularly impressive is the measure for job security. The difference between households telling that jobs are easy to get and households complaining about jobs being hard to get rose to the highest level since 2001. Such a level of job security is consistent with an acceleration of wages,” says Allenspach, writing about Tuesday’s consumer confidence numbers.

Julius Baer are forecasting the EUR/USD to fall back to 1.12 over coming months, making them notable Dollar-bulls.

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US house price growth also accelerated in July, according to S&P Case Shiller data released Tuesday, as healthy demand collided with a tightening supply of homes on the market.

Home prices rose at an average rate of 5.8% during the month, up from 5.7% during the previous month, according to the S&P CoreLogic Case-Shiller National Home Price NSA index.

“We maintain our call for a reduction of the balance sheet starting in October and a further rate hike in December,” Allenspach says.

Expectations of a more moderate pace of Federal Reserve rate hikes have conspired with geopolitical risks around North Korea and a brighter outlook for global growth to push the US dollar lower against its major counterparts over recent weeks.

The sell-off gathered pace Friday and into the current week after Fed chair Janet Yellen passed up the opportunity to question a growing chorus of voices suggesting the Fed may look to hike rates more slowly.

“Should tangible events – macro data and the Trump administration’s actual performance – prove current concerns for the US economy to be excessive (as was the case with the optimistic response of the markets to Trump’s victory), the Dollar will be in the position to rise back further,” says Asamara Jamaleh at Italian lender Intesa Sanpaolo.