Fx daily dollar is on a roll

Key arguments

• Soft August US PCE failed to dent Fed tightening expectations; one-month USD OIS one-year forward briefly fell 5bp then fully retraced by the US close.
• US consumer spending holds up and ADP suggests payroll growth is accelerating, supporting the Fed's hawkish stance ahead of tomorrow's September nonfarm payrolls.
• EUR/USD weakness has been driven by Fed repricing rather than independent euro weakness, but the French OAT-Bund spread widening to +127bp risks adding euro risk premium and constraining ECB tightening.
• A UK move toward rejoining the EU would likely be seen as FX-positive for sterling, though clarity is years away; any bid may come around the ~20 November UK-EU summit.

Corresponding source evidence

1. Yesterday s softer-than-expected August US PCE inflation data barely put a dent in Fed tightening expectations, perhaps because US activity data continues to come in on the encouraging side.
2. EUR/USD is testing the lows of the year and looks vulnerable The dollar is testing the highs of the year and could go higher USD: Activity data backs up the Fed's hawkish position The DXY dollar index is testing the highs of the year at 101.80.
3. Firming up the view that the Fed will need to tighten again has been the activity side, where consumer spending data is holding up and there are even signs that payroll growth is accelerating again – this from the monthly ADP report released yesterday.