Title: FX Daily: The Dollar Begins to Show Signs of Strain
Original article by Chris Turner, Global Head of Markets at ING
The US dollar, once firmly in the driver’s seat across the FX markets, is beginning to show signs of vulnerability. Investors globally are recalibrating their outlooks amid shifting interest rate expectations and diverging economic data, leading to notable movements in several currency pairs. Chris Turner of ING provides a comprehensive view of recent developments in the FX space, noting that the dollar’s recent performance reflects broader macroeconomic themes and shifting central bank dynamics. Below is an expanded analysis of that outlook.
Global Market Overview and USD Outlook
The recent price action in FX suggests that the US dollar is losing traction as key macroeconomic indicators weaken and expectations for Federal Reserve policy rates adjust accordingly. As economic momentum slows and inflation data becomes more balanced, the aggressive pricing of interest rate hikes from the Fed is being reassessed.
Key factors influencing recent dollar weakness:
– Dovish Pricing Trends: There has been a softening in the projected path for the Federal Reserve’s rate hikes. Recent comments from FOMC members and relatively mixed US economic data are fueling speculation that the peak in the Fed Funds rate may be near.
– Softening US Data: Retail sales, ISM manufacturing, and other high-frequency indicators are showing signs of cooling. While labor markets remain tight, recent jobless claims data hint at a more balanced employment picture.
– Markets Positioning: Investor positioning has become stretched with long-dollar bets, creating a setup for corrections on weaker-than-expected US data.
These developments have pushed the dollar lower across the board, especially against currencies such as the euro and British pound, which are benefiting from stronger respective regional dynamics and hawkish central bank outlooks.
EUR/USD: Supported by Hawkish ECB Rhetoric
The euro has found upward momentum against the dollar in recent sessions, consolidating above the 1.09 level and threatening to move toward the psychological 1.10 barrier. Part of the euro’s support comes from solid European Central Bank (ECB) messaging and improved economic data in the eurozone.
Factors supporting the euro’s strength:
– ECB’s Hawkish Tone: Multiple ECB officials have reinforced their commitment to continued tightening to combat inflation. Despite soft patches in European economic data, the ECB appears poised to raise interest rates further this year.
– Inflation Trends: Core inflation in the eurozone remains sticky, providing justification for additional rate hikes.
– Asymmetric Dollar Reaction: While weak US data weighs on the dollar, the eurozone hasn’t produced data that dramatically undermines the ECB’s hawkish narrative.
– Market Expectations: Futures markets attribute a significant probability to a further 25 basis point rate hike by the ECB in July and potentially another in the fall, adding to euro strength.
ING forecasts EUR/USD potentially reaching or exceeding 1.10 in the coming sessions, provided that risk sentiment remains stable and no major downside surprises hit the eurozone economy.
GBP/USD: Sterling Strength Relies on BoE Credibility
Sterling has maintained a bid tone versus the dollar, with GBP/USD staying comfortably above the 1.27 level. Significant hawkish repricing of the Bank of England’s (BoE) policy expectations has played a major role in propping up the pound. UK markets are now fully pricing in multiple rate hikes ahead, significantly revising previous expectations.
Key reasons for the pound’s resilience:
– Sticky Inflation: UK core inflation and services inflation measures are proving stubborn, pushing the BoE toward a more aggressive tightening stance.
– Labor Market Tightness: Wage growth continues to surprise to the upside, reinforcing the BoE’s hawkish path.
– BoE Commentary: Officials have clearly signaled more policy tightening, with markets now expecting the Bank Rate to peak above 6%.
– Market Confidence: With clearer guidance from BoE policymakers, investor confidence in the institution’s inflation-fighting credibility has increased
Explore this further here: USD/JPY trading.