US Dollar Weakens Ahead of ECB decision and US Q2 GDP Data –


US Dollar (DXY) Analysis

  • USD barely budges after the FOMC announcement as traders require more convincing around another rate hike. Dollar weakness seen this morning ahead of ECB
  • Large speculators, hedge funds positioning suggests greater USD pessimism
  • Major risk events: US Q2 GDP and PCE inflation data
  • The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

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Sluggish Dollar Gets Wake up Call as Traders Eye ECB Rate Meeting

With markets almost completely pricing in a 25-basis point hike form the Fed yesterday, there was very little USD volatility to speak of. Furthermore, the lack of forward guidance form the Fed gave the market no clear indication of where interest rates are headed for the rest of the year.

The fact that inflation has made progress without bringing the economy to its knees was seen as a major positive from Jerome Powell – leaving the door open for the so called ‘soft landing’. Progress made due to prior tightening efforts has afforded the Fed time to observe the effects of tighter financial conditions on the real economy.

It sounds really obvious, but it really does hinge on inflation. A strong economy and robust labour market can be tolerated as long as inflation heads lower. The moment we see a shock print higher, all that optimism turns into greater motivation to consider another hike.

Looking at the chart this morning, the dollar basket has turned sharply lower as traders focus their attention on a relatively more hawkish ECB. Core inflation in the EU edged higher in June, complicating the task at hand for the governing council. With EUR/USD making up the majority weighting in the basket, selling has picked up and now sees the index heading further away from 101.00.

100 flat becomes the next psychological level of support followed by the zone of support around 99.40. Resistance now becomes the 101.00 level that held up just before the Fed meeting.

US Dollar Basket (DXY) Daily Chart

Source: TradingView, prepared by Richard Snow

The more rate-sensitive 2-year Treasury yield edged lower in the lead up to the FOMC announcement as well as in the aftermath. As the Fed nears, or is potentially at, the peak in interest rates, the bar for higher yields is a high one.

US 2-Year Treasury Yield

Source: TradingView, prepared by Richard Snow

Institutions Increase Net-Short USD Positioning

Large institutions that are obliged to report positions to the CFTC added to their already short positions ahead of the event. With the hiking cycle coming to an end, it would appear that the US dollar may come under pressure in the absence of aggressive rate hikes to underpin the attractiveness of the dollar. This is of course, assuming there are no systemic shocks to the system which would naturally favour safe haven currencies like the US dollar.

USD Institutional (Large Speculator) Positioning Based on the Latest Commitment of Traders Report

Source: Refinitiv, CFTC CoT Report prepared by Richard Snow

Markets are currently pricing in a little over 22% chance of a 25-bps move higher in September and a 40% chance of another hike at any stage before the end of the year.

CME FedWatch Tool Depicting Market Implied Probability of a September Hike

Source: TradingView, prepared by Richard Snow

Main Risk Events Ahead

US GDP data continues to flatter on a relative basis when compared to other major economies. An expanding services sector leads the way and earnings growth remains firmly in place, helped by a robust labour market. A better-than-expected print may lift the chances of another rate hike into year end but there will be two months’ worth of data before the next Fed meeting so lots to still consider.

Core PCE has the opportunity to advance the disinflationary narrative, expected to print lower for June. The data has the potential to continue the DXY selling currently underway as we look ahead to the ECB rate decision later today.

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— Written by Richard Snow for

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