USD steady, focus May drift towards FOMC - Scotiabank

The week is kicking off on a fairly quiet note and it may stay that way if markets look through this week's data and await the outcome of the FOMC decision (and everything that might follow from the expected hold) at the end of the month, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD little changed as markets mull data and Fed meeting

"White House lobbying for lower interest rates may intensify, focusing markets on curve steepening and dollar-bearish trades. Fed Governor Waller has made it pretty clear where his vote will land at the FOMC next week. It's rare for FOMC voters to show their hand ahead of the meeting but it's not unknown. Waller has taken a dovish perspective on the rate outlook recently but whereas comments earlier this year focused perhaps a bit more on inflation as grounds for easing, more recent comments have tended to emphasize the employment outlook."

"Dissenting votes against FOMC action are not unusual either but the chart below reflects the fact that dissent is a bit more common among the Fed regional presidents than governors. Still, Governor Bowman (September 2024) and Waller (March this year) represent the last two examples of dissenting opinion on policy. Meanwhile, tick tock. Incorporating the tariffs in last week's letters, reports indicate that US consumers are facing an overall average effective tariff rate of nearly 21% as of August 1. It might be higher than that if sectoral tariffs are also levied."

"While there are signs of tariff cost sharing across the supply chain, according to Fed President Bostic, an at least temporary price jolt seems very likely. Few other Fed policymakers are likely to swayed by Waller's jobs concerns at this point. The USD is narrowly mixed versus the core majors on the day. The JPY is outperforming after the Japanese upper house elections delivered the expected setback for the ruling LDP coalition but PM Ishiba said he will not step down. The DXY is consolidating but price action retains a soft undertone following last week's volatility around President Trump/Fed Chair Powell firing kerfuffle. DXY support at 98.00/10 remains vulnerable."