Risk sentiment deteriorated further at the start of the new week with weaker data out of China as well as investors’ cautiousness ahead of the July Fed meeting driving global stock markets and commodity prices lower.
That is not translating into broad USD-gains, however, with the G10 currencies regaining ground against the greenback. We suspect that, similar to last week, positioning is playing an important role as driver of FX markets’ price action.
Indeed, we think that investors already running considerable USD longs are waiting for more hawkish signals from the Fed to add to that position.
While it is too early for a Fed rate hike on Wednesday, it seems likely that the July statement will provide a more upbeat view on the US growth and inflation outlook. This will be consistent with Fed Chairwoman Yellen’s recent testimony, in which she made a case for early lift-off as part of Fed’s gradual removal of monetary accommodation. We therefore see little scope of rising USD selling interest from here.
On the day, investors will focus on the US durable goods orders release for June where market consensus is looking for a rebound. If confirmed, more upbeat data could strengthen the case for more constructive Fed message on Wednesday. This could help USD regain ground broadly.
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