Some scope for the Dollar to advance further from here – MUFG
The US Dollar is likely to take a lead from the rates market into the key data release of the week – the July CPI report on Thursday, economists at MUFG Bank report.
Reduced volatility means yields matter
EUR and GBP are a little over-extended to the upside while USD/JPY has scope to drift higher. Of course, the USD/JPY scope may not materialise and that rates/FX divergence likely reflects a degree of uncertainty that has emerged following the change in the YCC framework.
Of course, rate spreads will matter as long as these low vol conditions last. We have entered the Aug-Sept period which historically can be the most volatile times of the year. There doesn’t appear to be anything on the immediate horizon to alter the current conditions and while from a rates spread perspective that might allow for some further US Dollar strength, we equally don’t see these conditions as conducive to any meaningful FX moves either. Given we have another CPI print before the Sept FOMC it also means the importance of this week’s CPI is diminished.
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FXStreet Insights Team
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