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DXY appreciated another 2.4% to 106.1 this month, on top of August’s 1.7% rally after an aggressive sell-off in early July. The DXY’s recovery gained traction after the Fed stopped projecting a US recession at its FOMC meeting on 26 July, followed by two months of stronger inflation readings. Today’s PCE deflator inflation should rise like the CPI a fortnight ago. Although the Fed paused on 20 September, it convinced markets of its “higher for longer rates” bias by keeping the door open for an additional hike later this year and projecting fewer cuts in 2024. The US Treasury 10Y yield farther above 4% to 4.57% in September. While markets agreed with the Fed’s soft-landing outlook, they feared more rate hikes would increase recession risks in Europe.
Three European currencies in the DXY basket depreciated most in September, led by the CHF (-4%), the GBP (3.5%), and the EUR (2.9%). The European Central Bank’s surprise rate hike on 14 September could not eclipse the Eurozone economy’s deteriorating outlook flagged by the ECB in July. Five economic institutes predicted that the German recession would be worse than initially thought. Germany’s CPI inflation dove to a preliminary 4.5% YoY in September from 6.1% in August, its lowest reading since February 2022. Today, consensus expects a similar plunge in the Eurozone’s CPI estimate to 4.5% from 4.2%. Not surprisingly, ECB officials have been signalling a pause at the next governing council meeting on 26 October, with the narrative shifting to keeping rates “high for longer.” EUR/USD peaked at 1.1276 around mid-July and plunged to a ten-month low of 1.0488 in late September.
USD/CHF bottomed at 0.8553 and surged to 0.9225, while GBP/USD spiralled from 1.3142 to 1.2111 this quarter. USD/CHF and GBP/USD are back inside the 0.90-0.94 and 1.18-1.2450 ranges of December-March. Markets expected the Swiss National Bank and the Bank of England to hike on 21 September, but they paused instead on declining inflation and growth worries. Unlike the US, the UK’s CPI and core inflation did not rise and fell instead. This quarter, Switzerland’s headline and core inflation returned to the 0-2% target. GDP growth flattened to 0% QoQ sa in 2Q23 from 0.3% the previous quarter in Switzerland and to -0.5% MoM in July from 0.2% in 2Q23 in the UK. 
In the immediate term, markets are bracing for a possible US government shutdown in the first fortnight of October. According to the New York Times, statisticians have collected the data for the September jobs report, but a prolonged shutdown could affect the next survey to be conducted in mid-October. The Fed could also lose information about CPI inflation (scheduled for 12 October) before its FOMC decision on 1 November. However, the Fed is unaffected by the shutdown, with many Fed officials speaking in the first half of October. Earlier this week, we highlighted some observations from the last shutdown between December 2018 and January 2019. DXY gave back gains only after the shutdown began but regained its composure when a resolution was in sight in Congress. All said, we remain mindful that the DXY’s outlook has been driven as much by the weakness in Europe as the Fed’s optimism for a soft landing.
Quote of the day
“The greatest failure of all is the failure to act when action is needed.”
John Wooden
29 September in history
In 2008, the stock market crashed after the first vote in the US House of Representatives on the Emergency Economic Stabilization Act failed, leading to the Great Recession.
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