The abnormally large reaction to jobless claims figures yesterday was a testament to markets' extremely elevated sensitivity to all sorts of indications on the US macro outlook right now. Perhaps many investors saw the recent equity selloff and dovish repricing in Fed rate expectations as an excessively pessimistic reflection of what's going on and were waiting for the first encouraging piece of data to pay US Dollar (USD) rates, ING’s FX strategist Francesco Pesole notes.

Any core CPI upside surprise is set to be USD positive

“In practice, the jobless claims report was not that informative. The decline from 250k to 233k was a surprise, but continuing claims actually rose in the week into 27 July from a revised 1869k to 1875k. That still indicates difficulties there for people wanting to rejoin the workforce.”

“Now, we can reasonably expect the market reaction to next week’s US core CPI numbers to be significant even for small from the consensus 0.2% MoM. Any upside surprise would be a clear-cut USD positive, as equities would sell off. However, short-dated UST could also come under pressure on a hawkish Fed repricing, unlike in the first unemployment-driven stock market rout.”

“Today, the data calendar only includes non-market-moving NY Fed inflation expectations and the July monthly budget statement. With two-year USD swap rates struggling to rebound above 3.80-3.85% as Fed rate cut bets by year-end prove sticky around 100bp, the room for the dollar to re-link with less supportive rate fundamentals remains wide. We still look for a return below 103.0 in DXY.”