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FOREX: May Not Need to Re-Price 125bps Fed Cuts for USD Index to Revisit Lows

FOREX
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  • The USD Index has traded through the Wednesday/Thursday low today and, despite today's muted price action and limited volatility, looks softer headed into the Wednesday US CPI print. A close at current, or lower, levels for the USD Index would keep the 50% retracement of the bounce off early August's 102.160 under pressure.
  • Instead, the limits for further slippage for the greenback are the pricing of the unlikely outcome of a 50bps rate cut in September - a minority view seen by few on the Street. The USD Index's 102.160 print coincided with Fed cumulative Fed pricing of ~125bps for 2024 (vs today's ~100bps) - an unlikely outcome of tomorrow's CPI print.
  • However, a sizeable miss on US CPI, allied with post-Olympics political solidity in France and a narrowing FR-GE yield spread would add considerable pressure to the USD Index via EUR demand. EUR sits as comfortably the largest contributor to the USD Index and an overlooked catalyst for USD strength across June.
  • Fed expectations are naturally key here - and the JPY short-covering rally and persistent build in the GBP net long are no longer the distraction they once were, resulting in cleaner positioning across G10 relative to just three weeks ago.
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  • The USD Index has traded through the Wednesday/Thursday low today and, despite today's muted price action and limited volatility, looks softer headed into the Wednesday US CPI print. A close at current, or lower, levels for the USD Index would keep the 50% retracement of the bounce off early August's 102.160 under pressure.
  • Instead, the limits for further slippage for the greenback are the pricing of the unlikely outcome of a 50bps rate cut in September - a minority view seen by few on the Street. The USD Index's 102.160 print coincided with Fed cumulative Fed pricing of ~125bps for 2024 (vs today's ~100bps) - an unlikely outcome of tomorrow's CPI print.
  • However, a sizeable miss on US CPI, allied with post-Olympics political solidity in France and a narrowing FR-GE yield spread would add considerable pressure to the USD Index via EUR demand. EUR sits as comfortably the largest contributor to the USD Index and an overlooked catalyst for USD strength across June.
  • Fed expectations are naturally key here - and the JPY short-covering rally and persistent build in the GBP net long are no longer the distraction they once were, resulting in cleaner positioning across G10 relative to just three weeks ago.