12/07/2024
US dollar update
Summary
The US dollar has been under significant pressure, with the DXY index experiencing notable declines. This downward movement is largely attributed to recent US inflation data, which has bolstered expectations for a potential interest rate cut by the Federal Reserve (Fed) in September. The latest US Consumer Price Index (CPI) figures revealed a decrease in headline inflation to 3.0% year-on-year (YoY) in June from 3.3% in May, while core inflation fell to 3.3% YoY from 3.4%. Monthly core inflation also saw a slight decline to 0.1% from 0.2% previously. This easing of inflation has significantly strengthened market confidence in a rate cut, with the probability of a 0.25% reduction until the September Federal Open Market Committee (FOMC) meeting now estimated at 92.6%, up from 77.7% last week.
Fed Chair Powell maintained a cautious stance, emphasizing that the Fed’s job in managing inflation is not complete and suggesting more work may be needed before rate cuts can be confidently pursued. Nonetheless, the Fed does not necessarily require inflation to be below 2% to commence rate reductions.
The dollar index dropped to as low as 103.75 on Thursday, marking a 15-month low, and has remained around 104.15, poised for a second consecutive weekly decline. The market’s reaction was also influenced by the anticipation of upcoming economic indicators, including the US Producer Price Index and the Michigan Consumer Sentiment Report. Producer prices are expected to show a slight increase from 2.2% to 2.3% YoY, which could hint at rising demand-driven inflationary pressures. The Michigan Consumer Sentiment Index is forecasted to edge up slightly from 68.2 in June to 68.5 in July. These indicators are crucial as they can provide further insights into consumer behavior and potential inflation trends.
Externally, the dollar faced additional pressure from a rallying yen, driven by suspected intervention by Japanese authorities. This multifaceted economic backdrop underscores the complex dynamics at play in the foreign exchange market, particularly concerning the US dollar’s trajectory amidst evolving inflation data and monetary policy expectations.
Market Views & Opinions
ING in a recent article ‘The focus on local FX champions’ in the entity ‘Second-half prediction: The strugglers’ says:
“We believe the euro, sterling, the Canadian dollar and the Swiss franc will struggle more than others in the G10 to outperform in the next couple of months. We estimate that those are the only four currencies which cannot count on an economic fundamental-based undervaluation against the US dollar. More specifically, the euro may well remain trapped around 1.08 by the French political gridlock and related fiscal concerns despite a relatively market-friendly outcome of the parliamentary election. Sterling may take a hit from the start of the Bank of England’s cutting cycle in August, while the Canadian dollar and the Swiss franc could be dampened by ongoing domestic easing and soft data.”
Reuters in a recent article ‘Dollar drops, yen surges as consumer prices fall in June’, by Karen Brettell says about the US dollar:
“Analysts noted that the move was likely caused by a large repositioning after the softer U.S. consumer price index (CPI) earlier on Thursday. A rate cut in September by the U.S. Federal Reserve is now seen as more certain, which will reduce the attractiveness of long dollar/yen trades. Positioning in long dollar/yen trades and momentum indicators were also stretched heading into the data release, with many traders caught on the wrong side of the move.”
IMPORTANT DISCLAIMER
The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.
a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.
