USD: Reaction to Powell looked a bit overdone from the start – ING

A round of risk aversion is hitting the FX market this morning as the Chinese earnings season has failed to offer any real support to Asian equities and the impact of Federal Reserve Chair Jay Powell’s speech on Friday wears off. The DXY dollar index has modestly rebounded since the start of the week, largely driven by the weaker EUR/USD, and one can probably argue another small leg higher in the greenback against pro-cyclical peers is warranted now, ING’s FX strategist Francesco Pesole notes.

DXY can break and find some support above 101.0

“After all, the OIS pricing for 100bp of easing by year-end means markets are positioned for a soft landing paired with no more inflation bumps. And while Powell’s explicit rate cut guidance has some significance, investors had fully priced in easing well before Jackson Hole and the negative USD reaction to the speech looked a bit overdone from the onset.”

“To be clear, we are not calling for a big dollar rally at this stage. Falling USD rates have made the greenback significantly cheaper to short and generalised dollar weakness is entirely consistent with Fed easing prospects being passed through to asset markets. However, the risks from a technical perspective and rate differentials are undoubtedly more balanced, and in the very near term slightly upside-tilted for the USD.”

“We discussed yesterday how another major USD leg lower may require markets to fully embrace the possibility of a US recession, so perhaps the lack of tier-one US data this week is good news for the dollar. The only event of the day is a speech by the Fed’s Raphael Bostic, who is generally considered hawkish-leaning and may not push the easing narrative much further. DXY can break and find some support above 101.0 in the next couple of days.”