If the mid-week rise in the US Dollar (USD) was a bit of mystery, yesterday’s additional gains at least had the backing of firmer than expected US data, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD holds weekly gains

"The data helped boost USD-supportive spreads and pare expectations around Fed easing risks over the balance of the year. A dose of geo-political worries added some further support to the USD at the margin. The USD has steadied in overnight trade but, at this point, it is looking at a fairly solid gain on the week following last week’s rejection of the low 96 area. A new round of hefty tariffs (pharma, heavy trucks, household goods) announced by the White House has failed to move markets materially."

"European stocks are mostly firmer and while the pharma sector is underperforming, it is marginal. Significant fundamental challenges for the USD remain and broader prospects are negative, from our point of view. Comments this week from Fed officials lay bare the rift in thinking between those policymakers who remain cautious on the outlook amid sticky inflation (Powell, Goolsbee, Schmid, for example) and those leaning towards more concern about the labour market (Bowman, Miran). And, with the latest NFP update a week away, markets may be cautious about bidding the USD up significantly in the short run."

"But there may be a case developing on the charts for the broader USD rebound to extend a little more and seasonal patterns do typically reflect some stabilization in the USD about now in the calendar year before a brief squeeze higher in late October/early November—ahead of renewed losses for the DXY right into year-end. The test for the DXY will be whether it can strengthen sustainably beyond the low/mid 98 zone that has tended to cap gains on a weekly close basis since the start of August. US August Personal Income is expected to advance 0.3% in the month, with Spending rising 0.5%. Core PCE is forecast to rise 0.2% in the month, keeping the Y/Y pace of gains at 2.9%."