Dollar extends slide ahead of PCE inflation data

Fed’s Waller sees the neutral rate at 3.0%

The dollar extended its slide on Thursday as investors remained largely convinced that the Fed will press the rate-cut button when it meets next month. This time, it was Fed Governor Waller who spoke about it, though his position was already known. Maybe that’s why the dollar has stabilized today, ahead of the PCE inflation data for July.

Waller said yesterday that he would support a rate cut next month and that he “fully expects” more reductions to follow to bring interest rates closer to their neutral level, which he sees at around 3%, 125bps below the current range of 4.25%-4.50%.

Although the US dollar and 10-year Treasury yields moved lower, the 2-year yield moved slightly higher, while, according to Fed funds futures, market expectations barely changed. Investors continue to price in around an 85% probability of a 25bps reduction in September and a total of 55bps worth of reductions by December.  They believe that Waller’s estimation of neutral level will be reached next September.

PCE data and Trump-Cook saga in focus

Today, investors will likely pay close attention to the PCE data for July, as they are the Fed’s favourite inflation gauges. Although the headline CPI for the month did not accelerate, the core CPI rate rose, implying upside risks to the core PCE index. Coming on top of accelerating producer prices, an acceleration in core PCE could prompt traders to scale back their Fed rate cut bets. Even if they remain largely convinced about a September rate cut, they may project a slower rate-cut path thereafter. This could allow the dollar to recover some of its recently lost ground.

Besides the data, investors are also noting questions about the Fed’s independence on their agendas. Following US President Trump’s threats to fire Fed Governor Lisa Cook, the Fed official filed a lawsuit on Thursday, claiming that the President has no power to remove her from office. Cook also filed a motion for a temporary restraining order, a hearing of which is set for today.

Still, the market’s response to the Trump-Cook saga has been relatively muted, but should investors reach the point where they perceive the Fed’s independence and credibility as compromised, they may start abandoning US assets again.

Wall Street at record highs, gold rises as well

For now, this is not the case, as all three of Wall Street’s main indices closed positive yesterday, with both the S&P 500 and the Dow Jones hitting fresh record highs. And this even as Nvidia closed lower due to earnings not clocking in well-above expectations as investors were used to in the previous seasons.

Accelerating PCE inflation today could be a reason for a pullback, but the outlook is likely to remain positive, as yesterday’s GDP data confirmed that the world’s largest economy is still at a good place. The second estimate for Q2 revealed an upside revision to 3.3% q/q from 3.0%, and although the Atlanta Fed GDPNow model is pointing to a slowdown to 2.2%, that’s still a solid print. Therefore, an economy that is not suffering deep wounds is unlikely to prompt a bearish reversal in equities.

Gold is also on the rise, as both rate cut expectations and uncertainty surrounding the Fed’s independence are exerting positive forces for the precious metal. The price is now headed towards $3,440, the upper bound of the range the metal has been trading within since May 20, the break of which could aim for the record high of $3,500 hit on April 22.