News & Analysis

The dollar started the week as it meant to go on. On Monday, speculation over fresh lockdowns in Shanghai after reports of rising Covid cases coincided with bullish dollar positioning following last week’s robust US jobs report, sending the DXY index north of 108 for the first time since 2002. After a brief stabilisation on Tuesday, June’s CPI data out of the US put the dollar back on the offensive, with EURUSD grabbing the headlines as it broke parity for the first time in twenty years. However, as markets traded more aggressive near-term tightening for a lower growth environment in the medium-term, further inversion of the US Treasury curve started to weigh on the dollar. This was then compounded by the Bank of Canada’s decision to hike rates 100bp, which sparked speculation that the Fed would follow suit. While initially this continued to put pressure on the dollar, speculation that the Fed would hike 100bp at the end of the month sparked a renewed wave of USD buying on Thursday, triggering fresh highs in dollar indices. However, high-profile Fed officials soon pushed back on the increasingly hawkish interest rate bets. Next week, the focus on US rates is likely to continue, but there won’t be any official communications from the central bank as it embarks on a communications blackout. Instead, the market focus will be on the ECB for official commentary as the central bank is expected to hike rates for the first time in 11 years, while the prospect of a 50bp hike from the BoE in August will be weighed as a fresh batch of UK economic data is released.

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