This is a massive week for the dollar, with several events that could move markets. Investors are keenly focused on the Fed’s decision at the end of its two-day meeting on Wednesday. A day later, the US will release its first reading of Q3 GDP. This could also shake up markets, particularly following the FOMC meeting. The calendar also includes the PCE price index and durable goods data.
Going into this data-heavy week, US markets are particularly tense, which could exacerbate dollar volatility. The sell-off in tech stocks suggests growing investor concern. Meanwhile, falling yields imply that investors are increasingly seeking safe havens. Markets are pricing in an 88% chance that the Fed will hold rates. This could trigger a relief rally in equities and support the dollar. However, the strong consensus means other data this week could have an even bigger market impact.
Growth Concerns Support and Weigh on the Dollar
The greenback faces opposing pressures, so market reactions might depend more on the context than the event itself. Inflation remains stubbornly high amid fairly weak jobs growth. However, AI investment is driving massive infrastructure spending that supports the economy. At the same time, this investment increases demand for capital, pushing yields higher. In other words, AI is both dragging on and supporting the dollar.
The dollar offers safe-haven premiums if the US economy continues to grow. However, stronger growth also means inflation will likely remain above target. If the Fed raises rates to contain inflation, it could slow the economy.
Higher rates make it harder to finance the AI boom. This discourages investors from buying dollar-denominated assets and increases the risk of a major correction or recession. Taken together, higher rates could counterintuitively undermine the dollar.
It’s All About the Context
Market reactions to the Fed will likely depend on economic data. Likewise, investors will interpret the data based on the Fed’s actions. A more hawkish Fed, supported by steady PCE inflation and strong GDP, could supercharge the dollar. However, unexpected PCE figures and weak GDP could undermine a hawkish Fed. This would likely weaken the dollar and boost gold instead.
Conversely, strong GDP growth alongside a less hawkish Fed could raise concerns about uncontrolled inflation. This could weigh on the dollar as long-term yields rise to reflect a higher risk premium. Gold could also gain.
Meanwhile, a more dovish Fed could initially weaken the dollar. However, stronger-than-expected PCE inflation or GDP could help the greenback recover. In practice, markets might not fully react to the Fed’s decision until Thursday and Friday. By then, investors will have more economic data to assess.
What the Market Is Looking For
Futures indicate that markets expect the FOMC to hold rates but pave the way for a December hike. The focus will likely be on Fed Chair Kevin Warsh, despite his reluctance to provide forward guidance.
If Warsh expresses concern about inflation, markets will likely gain confidence in a December rate hike. Otherwise, investors could interpret his comments as more dovish.
Markets anticipate that US September Core PCE will accelerate to 3.1% from 3.0%. This would keep pressure on the Fed to hike rates at its final meeting of the year.
Economists project Q3 GDP growth to accelerate to 3.1% from 2.2%, despite higher energy costs. The AI infrastructure build
