Fed and Dollar: The hawkish overvaluation Still in Play
The U.S. dollar continues its month‑long rally, and the DXY index remains above 101 points, the highest level in over a year, driven by rising expectations of a rate hike. The Fed rate futures market currently prices only a 17.3% chance of keeping rates unchanged at the December meeting, with an 82.7% probability of a hike, a scenario that seemed less likely just a month ago.
U.S. 2‑year Treasury yields have risen 18 basis points since the last FOMC meeting, and the debut of Warsh at the ECB forum in Sintra could further tighten the hawkish narrative today, especially in the context of CPI inflation staying above 4%. The key test for this scenario will, however, be Thursday’s NFP report – strong labor market data (including surprisingly high JOLTs at 7.59 million) will only reinforce the belief that the Fed still has room to tighten policy.
Polish Zloty Under Pressure from Weakening Industry
The zloty found itself in a somewhat different situation than the dollar, as June macro data from Poland paint a picture of an economy clearly slowing down. The PMI for industry fell from 49.4 to 46.1 points – the deepest decline since July 2025, caused by a sharp drop in new orders, including export orders, and further job cuts, now in the fourteenth month in a row. J
At the same time, CPI inflation surprised lower, falling to 2.5% YoY versus a consensus of 2.7% and a May reading of 3.1%, marking the fourth consecutive month of disappointing data.
This combination – weakening industry and fading price pressure – makes the FRA market increasingly price in a scenario of NBP rate cuts rather than hikes, which, combined with a hawkish Fed, puts the zloty on the defensive against both the euro and the dollar.
Japanese Yen: A Game of Time with Limited Maneuvering Space
The yen remains the most "tense" G10 currency, trading near multi‑year lows against the dollar and hovering just below levels that the market regards as another currency intervention line – according to ING it is the 162.0 area, and according to Indosuez even 164–165. The problem is that Tokyo’s options are formally limited – under IMF rules, Japan can conduct a maximum of three intervention episodes in six months to avoid losing its status as a fully freely convertible currency, meaning it has only two such "windows" left until November.
The wide interest rate differential between the U.S. and Japan and the slow pace of Bank of Japan hikes suggest that pressure for further yen weakening will persist regardless of potential interventions, and some analysts do not rule out even a test of the 170 level in the coming months.
