The first half of the year was rather choppy for the US dollar as massive bets of weakness were scaled down. Many on Wall Street expected the dollar to weaken as most of the other major currencies were about to deliver significantly more tightening. Regional growth rotations on an improving outlook from a roaring Chinese economy were also supposed to support the case for strengthening commodity demand.
The dollar might be positioned for a little more short-term strength here as the odds for more rate hikes have steadily increased while rate-cut bets get pushed into next year. The Fed’s higher-for-longer stance on rates seems to slowly be winning over some traders.
Macro traders will undoubtedly be following the NFP report but may fixate on next week’s inflation report. We could actually get a soft report that gives us a headline 2.9% year-over-year reading. The June inflation report might be a short-term bottom for the disinflation process as the base effects will be responsible for a large part of the decline. By the end of summer, inflation might prove to be sticky given the current drivers, which include economic resilience, a strong labor market, and decent spending.
USD/JPY
Sell signals are emerging, and intervention talk is brewing, given we are at levels that triggered Japanese intervention last year. Many USD/JPY traders are focused on the 145.50 region and the 143.75 level. Technical traders that follow DeMark indicators are eyeing a potential sell countdown, which would require a drop below the 143.90 level. If prices close above the 145.51 level, further upside could target the 150 zone. Last year, the Demark countdown finished in mid-July, and it soon saw an over 6% drop.
EUR/USD
EUR/USD bears have been increasing their exposure to options, with some eyeing some protection to euro weakness in Q3. Last week, the Depository Trust & Clearing Corporation saw the strongest demand in over two months, with put volumes gaining more attention with a 3:2 margin. The euro-dollar has been triangulating and appears poised for a breakout soon.
Potential trigger:
Everyone has their eye on the NFP report, but next week’s CPI report could be more impactful. Wall Street might become more confident after the July 12th inflation report that the Fed will be done after delivering one more rate hike.
EUR/CHF
The USD/CHF pair might start looking more bullish if the SNB keeps up the hawkish rhetoric. SNB President Jordan is suggesting monetary policy is not tight enough. Many traders, like ANZ are eying strategies that short EUR/CHF on any spike towards the 0.99 level.
Potential trigger:
Friday’s German industrial production and if economic gloom becomes the dominant theme for the eurozone.
AUD/USD
The RBA rate pause and softer Chinese services data sent the AUD/USD lower. Expectations for the Australian dollar to weaken further could grow if they see a much worse slowdown in the economy. Rate hike odds for the RBA are just over a coin flip for the August 1st meeting, so if the outlook deteriorates further, that could pave the way for more AUD downside.
Potential Trigger:
Friday’s expiration of A$1.5 billion of options at a strike price of 0.6700 could lead to some big moves.
