Risk sentiment remains shaky, but the US dollar hasn’t taken advantage of the latest correction in Asian equities. That may fit our view that USD is pricing in quite a lot of positives and faces downside risks, especially beyond the very near term. Elsewhere, markets may be growing some conviction that 162.0 is the new line in the sand for intervention
USD: Testing Rally Resilience
The mix of risk sentiment and data inputs for the dollar has remained mildly USD-positive in the past 24 hours, but the dollar has inched lower – a potential sign that some bullish momentum is fading. Yesterday’s rebound in US equities proved rather small and short-lived, and another correction in South Korean equities this morning is hitting global equity futures.
On the data side, the message on personal spending was mixed. First-quarter data was revised sharply lower from 1.4% to 0.5% quarter-on-quarter, which clouded the strong (0.7% month-on-month) May print. At the same time, first-quarter was revised higher to 2.1%, underscoring the strength of the AI growth push. May’s came in as expected at 0.3% MoM, leaving all the weight of setting the next big direction for expectations to upcoming (4 July) and (14 July).
The equity story remains very central for FX at the moment, and indications of still-fragile risk sentiment in Asia make it challenging to call for a quick reversal of recent USD gains. However, the latest price action seems to endorse, to some extent, our feeling that a lot of positives are in the price for the USD. At least beyond the very near term, the case for a dollar correction is getting stronger.
Today’s US calendar is quiet, and the Fedspeak calendar only includes Neel Kashkari (a hawk) today. Yesterday, Austan Goolsbee struck a more neutral tone compared to hawkish-sounding comments earlier this week, while John Williams unsurprisingly sounded more dovish than the current FOMC consensus.
EUR: Stabilisation May Continue
is searching for some stabilisation in the 1.1350-1.140 area. Inputs from the eurozone should remain quite secondary for the pair in the short term. Markets probably need a big miss next week or broader market turmoil to price out the one hike left in the EUR curve for this year. Equally, the bar is set quite high to add back another hike. Most of the action in rate expectations is happening on the dollar leg, which should remain overwhelmingly dominant in EUR/USD.
Accordingly, we don’t expect much of an impact from today’s ECB inflation expectations from May. They are expected to inch lower on the back of lower energy prices and imminent ECB tightening.
While we may not have seen the bottom in EUR/USD just yet, our baseline view is that the 1.130 support can hold, and the pair will return above 1.150 this summer.
JPY: 162.0 New LINE in the Sand?
Markets may be building some conviction that 162.0 in USD/JPY is the new line in the sand for FX intervention. This – alongside a softer USD environment – may help explain yesterday’s intraday drop after the pair touched a 161.95 peak.
Our current expectation is that 162-163 is the new intervention area, although the pace and the drivers of the next round of appreciation will determine the urgency and size of interventions.
The end of next week offers an opportunity for slightly lower liquidity around the 4 July US holiday (Saturday). If US payrolls are strong on 3 July, the Bank of Japan could indeed pull the trigger on new intervention. Our dovish Fed call makes us more optimistic that new FX intervention can have a more sustainable negative effect on USD/JPY, but timing remains very tricky; the market may well retain hawkish Fed expectations for a few more weeks, and Japan may be forced to intervene further than once more.
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