Basic forecast of the US dollar: neutral
- The US dollar (Via the DXY index) has fallen back as the calendar moved in mid-July due to falling expectations of rising Fed interest rates and falling U.S. Treasury yields.
- While another hot inflation report is expected, markets are actually less convinced that the Fed will soon raise interest rates; activities are limited to reducing asset purchases.
- According to tta IG customer mood index, The US dollar has a confusing prejudice until mid-July.
The US dollar back down
The US dollar (via the DXY index) has fallen as the calendar moved into mid-July due to falling expectations of rising Fed interest rates and falling US Treasury yields. But there should be a strong catalyst in the coming days – Tuesday’s US Inflation (CPI) report in June – the recent narrative shift may be around the corner.
Although, in theory, hot inflation readings should spread to higher US Treasury yields, the fact that the Federal Reserve continues to decisively demand “largely temporary” inflation may hinder a significant shift in yields. Accordingly, the US dollar has an asymmetric risk: a hot inflation report may do nothing to raise yields; a softer inflation reading could justify a second lower return.
The US economic calendar is fraught with risk
Moving to the middle of the month brings a significant risk of events out of the United States. A number of highly regarded economic announcements, together with a biannual congressional statement by Fed President Jerome Powell, potentially provide
- The US Inflation Report (CPI) for June will be published on Tuesday, July 13, with higher inflation rates expected to continue. The US federal government’s monthly budget is also scheduled for publication on Tuesday.
- A separate June U.S. Inflation Report (PPI) will be published on Wednesday, July 14, looking at corporate input costs (e.g., “factory gate”). Federation President Powell will head to Capitol Hill for Day 1 of his congressional testimony, reflecting the contents of the July Monetary Policy Report released on July 9. Fedi’s beige book will be published later that day.
- On Thursday, July 15, there will be weekly unemployment claims data before the July Philadelphia Fed Production Index. Data on US industrial production will be released later in June. Finally, Federation President Powell will return to Capitol Hill by Day 2 of his congressional certificate.
- On Friday, July 16, ahead of the US Michigan July Preliminary Consumer Sentiment Report, the US June Retail Sales Report, which included five-year inflation expectations, was released. At the end of the day, the US Treasury Foreign Bond Investment Report and general net capital flow data for May will be released.
Atlanta Fed GDP Now Q2 Growth Forecast (July 9, 2021) (Figure 1)
Based on data received so far, approx 2Q’21, Atlanta Fed GDPNow the growth forecast has been lowered again. After last week’s datareal GDP growth in the second quarter is now on the rise [4.7%] until [5.1%] percent.“
The next update of the Atlanta Fed GDPNow 2Q’21 growth forecast is scheduled for Friday, July 16th.
Absolutely US economic data forecasts, see DailyFX economic calendar.
U.S. Treasury Yield Curve (1 Year to 30 Years) (July 2019 to July 2021) (Figure 2)
Historically speaking The combination of declining US Treasury yields with reduced Fed interest rate hikes has created a difficult trading environment for the US dollar.
Nourished the spotlight very much
The June US inflation report pays close attention to the Federal Reserve’s narrative that price pressures are “largely temporary.” While another hot inflation report is expected, markets are actually less convinced that the Fed will soon raise interest rates; activities are limited to reducing asset purchases.
We can measure whether a Fed the interest rate will be raised through Eurodollar contracts, examining in the future the difference between the borrowing costs of commercial banks over a period of time. Figure 1 below shows the difference – the difference – between borrowing costs for the July 2021 and December 2023 contracts to estimate where interest rates fall between July 2021 and December 2023.
DISSEMINATION OF THE EURODOLLAR FUTURES AGREEMENT (JULY 2021 – DECEMBER 2023): DAILY SPEED MAP (March 18 – July 9, 2021) (CARD 3)
With them Next July The US non-farm payroll for June estimated an increase of less than 107 basis points by December 2023; now is just over 88-bps price-in. The markets are less receptive to this FOMC, plain and simple. In fact, almost 80% of 25-bps has been wiped off the table.
CFTC COT US Dollar Futures Positioning (July 2020 – July 2021) (Figure 4)
Finally, looking at the positioning, according to the CFTC last week’s COT July 6 speculators short to net length, cumulativenet long US dollar position 7564 cattracts. While the positioning of the US dollar has fluctuated around a fairly neutral level over the past three months, the futures market has been the most online market in the last 52 weeks due to the recent positioning change.
– Written by Senior Currency Strategist Christopher Vecchio, CFA