USD: First data test of the week - ING

Currency volatility should pick up today as US markets re-open after the long Labour Day weekend and data releases take over. The big event of the day is the ISM manufacturing index in the US. Remember this has been in contraction territory (i.e. below 50) every month since October 2022, excluding a short-lived rebound in March this year. The slack in the manufacturing sector has been priced in for a while, and we'll probably need to see a rather soft number to trigger recession alarms and drive the dollar materially lower, ING's FX strategist Francesco Pesole notes.

DXY to flatten in the 101.50/102.0 range

"The consensus is looking at a modest improvement in August, from 46.8 to 47.5. One sub-index that we are monitoring closely is the ISM Prices Paid, which also experienced a spike this spring but has been subdued over the past couple of months. Consensus expectations are for a decline from 52.9 to 52.0, which should feed into the Fed's and the market's conviction call on disinflation."

"Our calculations on CFTC future speculative positioning data show that the dollar has moved close to neutral positioning, with aggregate net longs against reported G10 currencies now only amounting to 5% of open interest, as of 27 August. That is a substantial squeeze from 16% in early July and 24% in early May. When combining this notion with a Fed pricing that factors in one 50bp cut by year-end, the case for another major leg lower in the dollar needs to be matched by rather bearish expectations on upcoming US activity data."

"Our US economist is on the lower end of the consensus for payrolls on Friday, but before then there may not be enough bad news to take the dollar much lower. A flattening of DXY in the 101.50/102.0 range is our baseline until Thursday."