Dollar Could Gain Momentum from Hawkish Fed Stance

Dollar could get a lift from hawkish Fed script

Having hit a new low for the year in the aftermath of the soft June CPI report, the dollar has since been clawing back those losses. At the heart of that story is market uncertainty as to how the Fed may react to one piece of soft price data. As above, it looks a little too early for the Fed to drop its tightening bias and switch to a data-dependent approach. With the market positioning itself for a cyclical dollar sell-off over coming months and quarters, we suspect another reading of the hawkish Fed script could send the dollar a little higher. Looking at the FX options market, the expected EUR/USD 24-hour trading range encompassing both the Fed and European Central Bank decisions next week is only 60 USD pips. Clearly, fireworks are not expected, but EUR/USD could dip back towards the 1.1050 area on the Fed event risk.

Looking beyond next week’s Fed meeting, softer US price data over the summer – plus some softer activity data too – should keep the dollar on the soft side. And dollar losses should accelerate in the fourth quarter when the Fed has more evidence to embrace the disinflation story and we move into what is normally a weak seasonal period for the dollar. We have a year-end target for EUR/USD at 1.15.