DXY Eases Under 106.50 Amid Upbeat Market Tone; AUD/USD Gains 1.0%

Key Points

• The US dollar weakened modestly on Monday amid an upbeat tone to global macro trade.
• The DXY fell back under 106.50, but analysts expect recent strong US data and Fed tightening expectations to offer support.
• The risk-sensitive Aussie, kiwi and loonie all outperformed.

Buck Softens Amid Positive Risk Tone, But Big Declines Not Expected

The US dollar edged lower on Monday, weighed amid a lack of demand for safe-haven currencies given an upbeat tone to global macro trade. Traders seemed to focus more on the positive signals last week’s strong US economic data sent about growth, as opposed to the boost that the strong data gave to Fed tightening bets.

The Dollar Index (DXY), a trade-weighted basket of USD-majors, subsequently fell back below 106.50 and was last changing hands down close to 0.2% lower on the day, having risen from earlier session lows just above 106.0. While risk appetite was clearly a negative for the buck on the day, the idea that the Fed will continue tightening at an aggressive pace to stem inflation in a US economy that seemingly continues to run hot gave the buck support.

Fed policymaker Michelle Bowman said over the weekend that the Fed should continue to consider 75 bps rate hikes at upcoming meetings. Other Fed policymakers have recently doubled down on the fact that the bank is determined to tackle multi-decade highs inflation, which investors have interpreted as pushback against markets that in late July had moved to scale back Fed tightening bets in 2023.

Traders are focused on upcoming US Consumer Price Index figures for July set for release on Wednesday. The data is expected to show moderation in both the MoM and YoY headline rates of inflation to 0.2% and 8.7% respectively, though the YoY rate of core inflation is seen picking up to 6.1%. The data should keep markets betting that a third consecutive 75 bps rate hike looks like the most likely outcome from the Fed’s September meeting.

University of Michigan Consumer Sentiment survey data on Friday will also be closely scrutinized, especially the inflation expectations sub-component, given that inflation remains a key market theme. Further declines in consumer inflation expectations should ease concerns at the Fed about elevated inflation becoming embedded.

Euro, Pound Languish Despite Weaker Buck

The euro and pound both failed to stage a meaningful rebound against the US dollar on Monday, likely reflective of the fact that the economic outlook and outlook for central bank tightening in both the UK and Eurozone looks substantially poorer than the US. The EU faces a worsening energy crisis as Russia tightens the screws on its gas exports, while the UK is also in the midst of its worst cost-of-living crisis in multiple decades.

The BoE last week predicted in its new forecasts that the UK economy will shrink for five consecutive quarters from Q4 of this year as a result. UK GDP data out later this week is expected to show that the UK economy shrank by 0.2% in Q2. Divergence in expectations regarding the performance of the UK, Eurozone and US economies in the coming quarters is likely to provide ongoing support for the buck for now.

The more risk-sensitive G10 currencies such as the Aussie, kiwi and loonie outperformed on Monday, with the latter helped by a rally in oil prices from multi-month lows. However, the Aussie, despite gaining 1.0%, and kiwi, despite gaining 0.7%, were both unable to hold above the key 0.7000 and 0.6300 psychological levels.