News & Analysis

Price action in the US dollar over the past week has reflected the recent shift in monetary policy considerations. Prior to the Fed’s meeting on Wednesday, interest rate markets priced tighter near-term monetary policy with little consideration to growth, leading to the Treasury curve inverting the most since the early 2000s. The combination of growth concerns and still elevated expectations for near-term Fed policy tightening kept the dollar buoyant at the start of the week. However, the tide started to turn for the greenback following Wednesday’s Fed decision as commentary by Chair Powell suggested the pace of tightening in the US was soon set to slow as monetary policy edges closer to restrictive territory. Furthermore, the shift in the Fed’s reaction function towards a more data-dependent stance meant volatility in USD crosses rose around the release of the few key data points in the data calendar. Following the Fed meeting, the dollar broadly softened, led by a rally in the Japanese yen on lower US yields and renewed global growth concerns. However, positive beats in the US Q2 employment cost index and June’s PCE data saw the dollar firm heading into the weekend. Next week, with central bank decisions due from Brazil, Australia, and the U.K. along with a string of PMIs, the growth-inflation tango is set to continue for FX markets.

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Authors: 
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst

 

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