USD steadies but undertone remains bearish – Scotiabank

The US Dollar (USD) is trading a little higher overall on the session but its performance is more mixed against the G10 currencies and it slipped to its lowest since November against the CNY in overnight trade, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD decline stabilizes but headwinds from tariffs

"Risk sentiment is positive as progress is made on trade deals, despite criticism that the US/Japan trade agreement will do little to alter trade dynamics given the relief granted to Japanese automakers. Meanwhile, the average effective tariff facing US consumers remains elevated (around 20%) which will underpin worries about inflation gains in the short run and the potential constraint on consumer activity that tariffs may cause. The AUD and NZD are leading gains among the G10 currencies on the back of the pro-risk mood while dollar/Europe trades firmer on the day so far."

"The rebound in the USD may be temporary. While tariffs are likely to deliver a one-off increase in the price level, investors are clearly concerned that inflation risks becoming more entrenched, the more so perhaps amid the continued criticism of Fed policy by President Trump and pressure for lower interest rates. The 2Y US inflation swap has edged a little lower today but remains above 3% while futures continue to reflect around 100bps of Fed rates cuts over the next 12 months. We remain negative on the outlook for the USD in the medium term and think that the gains seen through the first half of July have likely run their course."

"The technical bear trend remains intact and trend dynamics are strengthening again after the early July consolidation. Event risk is a little higher today than earlier this week. The ECB policy decision is not expected to result in any policy adjustment but attention will be paid to how President Lagarde characterizes the outlook. US weekly Initial Claims are expected to edge up modestly, keeping Continuing Claims somewhat elevated. US July PMI data may reflect relatively resilient activity but price and employment sub-components will be of interest."