Fed’s Bostic Comfortable with Inflation Overshoot

The U.S. Dollar posted a new high for the year against a basket of currencies on Monday, climbing to its highest level since December 19. The catalysts behind the dollar’s strength is a combination of investors unwinding short positions, fresh money betting on higher rates in the U.S., and signs the U.S. economy is performing better than other regions.

June U.S. Dollar Index futures settled at 92.59, up 0.184 or +0.20%.

As Commerzbank analyst Esther Reichelt put it, the rally in the Greenback was the “bursting of a dollar negative bubble”.

U.S. Economic Reports

There were no major reports on Monday, but investors did get the opportunity to react to a couple of FOMC Member speakers.

Federal Reserve Bank of Atlanta President Raphael Bostic said the central bank can accommodate an overshoot of its inflation target and he isn’t worried by the impact of oil prices rising past $70 a barrel.

“We’re fluctuating around the 2% target. I am comfortable with that. To the extent we have seen some upward pressure, we don’t have the ability to stop trends on a dime. Some overshoot is fine”, Bostic said.

At his first public speaking appearance since his appointment to the helm of the Federal Reserve of Richmond, Thomas Barkin painted an overwhelmingly positive picture of the economy and made a case for rising interest rates.

EUR/USD

While investors have been cutting short positions against the U.S. Dollar, they have been also been reducing net long positions in the Euro.

Recent data have suggested the stellar growth seen in Europe last year is losing momentum, leading speculators to trim bets on the single currency on expectations the European Central Bank will wind down its stimulus.

The EUR/USD settled on Monday at 1.1923, down 0.0036 or -0.30%.

U.S. Commodity Futures Trading Commission data from last week showed that speculators’ positioning has gone to extreme levels as they had been selling the dollar continuously. The data revealed that speculators held 120,568 contracts of net short positions, down from a record 151,476 set last month, but still a high level.

Additionally, a wider measure of dollar positioning that includes contracts on some emerging market currencies showed net dollar shorts shrank to $18.32 billion, from a seven-year high of $28.18 billion two weeks earlier.

GBP/USD

The British Pound closed higher against the U.S. Dollar on Monday as investors reversed expectations of a rate hike at Thursday’s Bank of England meeting.

The GBP/USD settled at 1.3555, up 0.0030 or +0.22%.