US Dollar Fundamental Forecast: Bullish
- The US Dollar[1] climbed after Fed rate hike bets increased on strong CPI numbers
- Japanese Yen[2] weakness likely to continue on dovish Bank of Japan policy decision
- EUR/USD[3] to provide DXY tailwind with ECB rate[4] hike unlikely to temper inflation
The US Dollar climbed higher last week, hitting levels not traded at since September 2002, after a US inflation report strengthened Federal Reserve rate hike bets. The consumer price index (CPI) for June rose 9.1% compared with a year earlier, beating an expected 8.8% increase. Core inflation—a measure that removes food and energy prices—rose more than expected.
That increased the chances for a 100 basis-point rate hike at the July 27 FOMC[5] meeting to over 50%, according to Fed Funds futures. Those bets eased into the weekend but remained higher than before the CPI data. Federal Reserve officials helped to temper those expectations before the FOMC blackout period began on July 16.
Speculators trimmed long bets on the US Dollar for a second week, according to the latest Commitments of Traders report from the CFTC. Despite the two-week decline, speculators remain largely net long on the USD[6]. The data’s reference period ended July 12, which leaves markets in the dark over post-CPI positioning.
US Dollar (DXY) versus CFTC US Dollar Non-Commercial Longs
USD/JPY Faces Bank of Japan Policy Decision
The Japanese Yen fell to its lowest level since August 1998 versus the USD. JPY makes up 13.6% of the DXY Index’s weighting, coming in only behind the Euro[7]. Japan’s currency weakness stems from its diverging monetary policy. The Bank of Japan has maintained its ultra-loose policy, including yield-curve control (YCC), putting it
