The USD-underperformance continues as investors take profit on overextended longs ahead of the Fed meeting and the release of the US Q2 GDP.
Part of that seems driven by uncertainty about the outcome of the July meeting and the quality of the US data. Indeed, the renewed selloff in the Chinese stock market brought global growth concerns back on the table, presumably complicating Fed’s task.
In addition, the US durable goods data released yesterday did little to lift market uncertainty with the upside surprise for June partly reflecting downside revisions for May and hence unlikely to have strong positive impact on the GDP print.
Fuelling more uncertainty and weighing on USD seems to be the latest drop in US and global inflation expectations gauges, on the back of the persistent selloff in commodity prices. Gloomier inflation outlook presumably means less aggressive Fed tightening from here. That weighs on USD especially against lowyielding currencies like EUR, CHF and JPY.
So, is this the end of the USD-decoupling? We strongly doubt that. We expect the Fed to start hiking rates soon and suspect that the July statement would offer a more constructive assessment of the economy, consistent with Yellen’s recent congressional testimony. In turn, this could help USD regain more ground broadly. Risk sentiment could take a knock, however, and that could keep liquid G10 currencies like EUR and JPY generally supported as well.
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