USD: Focus on US data plus Powell at Sintra – ING

The dollar continues to edge lower in an environment characterised by lower volatility. On the subject of volatility, it's interesting to note that traded volatility levels for equities and debt have fallen further than they have for FX. Here, EUR/USD and USD/JPY traded volatility remains above 8% and 10% respectively over the next couple of months, probably on the view that FX will be the asset class to move most if some of those Liberation Day tariffs re-appear in July, ING's FX analyst Chris Turner notes.

Fed Chair Powell speaking at the Sintra conference

"And following on from the above, the issue of President Trump's tax bill passing through Congress, and what it means for the US fiscal position, is not seen as a big market driver this week. Here, US long-dated Treasury yields remain subdued and the swap spread remains contained. Perhaps it will have to be more news about poor demand at auctions, higher inflation or fears that the President will impose a dovish replacement for Fed Chair Powell that is required to place Treasuries back at centre stage for financial markets."

"Also worth saying here is that lower volatility continues to help the carry trade in FX markets, where the Brazilian real, Hungarian forint and Czech koruna have all delivered 5-6% total returns against the dollar over the last month. In the G10 space, it's the euro and the Swiss franc leading the pack. The fact that these two are not the highest yielders suggests the issue of liquid alternatives to the dollar is playing a role here, and that those structural fears remain present. On the subject of structural fears, who knows when the investment committee of a Taiwanese Life Insurer is going to decide to raise its FX hedge ratios on US assets."

"Back to the short term, the dollar has come quite far already and this bear trend probably needs feeding with some macro news. That news comes today in the form of the June ISM manufacturing release and the JOLTS data. On the former, the market will be looking at the trade-off between higher prices paid and lower demand/employment. Any softer prices paid with soft demand/new orders/employment is a dollar negative. Equally, higher prices paid and reasonable demand could be a mild dollar positive. DXY has taken out some big support levels recently and is now on major channel support (off a 2011 low) – that support level coming in around 96.50. Let's see whether today's US data feeds that bear trend, and also look out for any new comments from Fed Chair Powell speaking at the Sintra conference at 1530CET."