During August the US dollar strengthened against the euro in terms of London closing rates from 1.3383 to 1.3145. In addition, the dollar strengthened, but more modestly, against the yen from 102.75 to 103.93. The FOMC did not meet in August but is expected to further reduce the pace of asset purchases from the current USD 10bn worth of MBS and USD 15bn worth of US Treasury bonds at the September meeting and to terminate the program at the October meeting.
What is certain now is that jobs and wage data will remain a key driver of rate expectations going forward. Strong jobs data coupled with weak wage growth data have to date merely reinforced Chair Yellen’s view and have kept yields anchored. However, this new “pent-up wage deflation” theory presented at Jackson Hole means that strong jobs data can’t simply be ignored if coupled with weak wage data as it strengthens the case for pre-emptive monetary policy action as the labour market advances toward full employment. Additionally, any sudden rise in wage growth could be alarming for the interest rates market as it may fuel fears that “pent-up wage deflation” has suddenly ended
We expect labour market data to continue to point toward rate increases starting in mid-2015 that will help lift yields at the front-end of the yield curve. This will be key for lifting the dollar. Our Q2-2015 EUR/USD forecast remains 1.2700.
BTMU