US data surprises remains upbeat

Choppy trading persists in the forex market with USD mixed across the G10 and EM universe. Rate cuts by Chinese policy makers helped lift some of the high-beta currencies, coinciding with the recovery in commodity prices. That said, the G10 complex failed to respond to the move, indicating that market positioning and technical factors are likely driving markets at the moment. 

"At the same time the focus remains on the outlook for the Fed. Given the recent surge in volatility and dovish Fed Minutes, the market is now expecting the Fed to get cold feet when it meets next month. Fed fund futures now price in only a 28% of a move next month, which compares to 54% at the beginning of August", says Credit Agricole. 

This has helped the lower-yielding G10 currencies consolidate against the greenback even though it has continued to rally against most EMs. Hence, the Fed's trade weighted dollar index is down only 2% from its recent high. While risks to the September rate view has recently rose, data surprises still remain upbeat. 

Notably, the recent consumer and housing releases indicate that these sectors remain the bedrock of the US recovery. Consumer confidence surged in August, rising to 101.5 from 90.9 prior. This helped to offset last month's slowdown and points to healthy consumer spending in Q3. This report does not take into account the recent acceleration in market uncertainty but we think the precipitous drop in oil prices should mask any concerns. 

At the same time recent housing releases also paint an upbeat picture. New home sales recovered in July, rising 5.4% (annualized pace) from a month earlier. This reaffirms the recent uptrend and partially offsets the drop in June. Alternatively, the Richmond Fed Manufacturing Index for August argues the sector has yet to recover for the recent swoon, slowing to zero in August. This is also consistent with Richmond and Market PMI releases, which still show the manufacturing sector remains depressed.