Fed Chair Jerome Powell explicitly pushed back against a 50bp rate cut by year-end, and Israel started a ground offensive in Lebanon. In other conditions, the US Dollar (USD) would have rallied on such a combination of events, but sensitivity to Fedspeak and Middle East turmoil has been reduced, ING’s FX strategist Francesco Pesole notes.

Geopolitics-FX link is also rather weak at the moment

“On the Fed side, the 50bp reduction in September means that market pricing is more structurally dovish-leaning, perhaps also on the premises that the Fed wouldn’t want to underdeliver on easing should a 50bp move be priced in by the FOMC date. On Monday, Powell said the base case is two 25bp moves by year-end, which is unusually specific guidance that signals his discontent with market dovish pricing.”

“The geopolitics-FX link is also rather weak at the moment. Israel’s ground raids in Lebanese territory were a highly-anticipated risk by US authorities, and the escalation was somewhat expected. The lack of substantial repercussions on commodities, with oil prices staying weak, means that FX markets are also not responding to the latest developments. There are upside risks for the dollar here too.”

“On the US data side, we’ll see the August JOLTS job openings print today, which is expected at an unchanged 7673k after a surprise drop last month. Markets may be more sensitive to those job opening numbers than the ISM Manufacturing index, which is also expected to have stabilised around 47.5.”