FX Daily: Dollar hits post-FOMC perfect storm
The desk interprets current market dynamics as a reaction to recent dovish signals from the Federal Reserve and active JPY intervention, contributing to a significant drop in the DXY index. As highlighted in the note from ing-think, the dovish tones from Fed Chair Kevin Warsh and recent weak economic data precipitated a selloff, with the DXY index dipping back below the 100.0 mark. This comes as positioning in the USD is increasingly stretched, suggesting potential for further long-squeezing. Concurrently, concerns around JPY intervention have added to the pressure on the dollar. The upcoming Eurozone CPI data may further influence sentiment. Overall, while we might see stabilization, the desk remains cautious about signaling a bottom in this dollar weakness.
What the desk is arguing
The desk highlights that the combination of the Fed's dovish surprise and aggressive JPY intervention has created a challenging environment for the dollar, pushing the DXY lower. Per the full note, this brings USD levels close to those seen during earlier bullish sentiments expressed by Warsh in June, suggesting a serious shift in trader sentiment.
Recent economic indicators reflect this sentiment, with Core PCE rising only 0.1% in June and Q2 growth trailing at 1.5%, reinforcing fears that the Fed might struggle to enact tighter policy in the face of such data. Furthermore, USD/JPY's plunge over 3% in response to JPY interventions showcases a broader shift in market sentiment against the dollar.
Where it sits in our coverage
The current spot for EUR/USD is at 1.1533, with consensus targets for December 2026 ranging widely among firms. Notably, some forecasts include Morgan Stanley at 1.1600, Deutsche Bank at 1.2500, and Citi at 1.1550.
The desk’s outlook appears positioned centrally in the consensus spread, highlighting a range of potential scenarios for the euro against the greenback, with corporate targets suggesting the potential for weakness in the dollar against the euro, particularly in light of potential Eurozone economic strength.
How other firms see it
A range of firms aligns with the desk’s view, including Morgan Stanley, Citi, and Deutsche Bank, all reflecting a bearish stance towards the dollar. Conversely, firms like HSBC and Goldman suggest more caution, with their forecasts indicating a firmer stance on the dollar's resilience.
The trajectory of EUR/USD is closely linked with both the Fed’s rate path and the upcoming CPI releases, which are crucial indicators of broader economic health in both regions, impacting trading dynamics in the USD.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01DXY index declines fueled by dovish Fed signals and JPY intervention.
- 02Core PCE rose only 0.1% m/m, indicating fragile inflationary pressures.
- 03Leverage funds' positioning suggests room for further USD long-squeeze.
- 04Upcoming Eurozone CPI data could shift market sentiment further.
Market implications
Watch for potential rebounds in DXY if U.S. economic data shows unexpected strength while keeping an eye on position adjustments in EUR/USD around the Eurozone CPI reading. A break below the 1.1500 level could signal further bearishness for the dollar.
Risks to this view
The dollar's trajectory could reverse sharply if upcoming economic data surprises to the upside, contrasting with recent weak inflationary prints. Furthermore, sustained aggressive JPY interventions could alter market perceptions of USD strength.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
ING | Bullish | 1.1500 |
Nomura | Bullish | 1.2000 |
Lloyds Bank | Bearish | 1.1200 |
Articles FX Daily: Dollar hits post-FOMC perfect storm Published 07:07 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The hangover from a dovish Fed surprise, paired with JPY intervention ahead of this morning’s BoJ hold, has taken DXY back to levels seen during Warsh’s USD-bullish June press conference. It may be too early to call a bottom in this USD selloff, but we could see some stabilisation today. Eurozone CPI data is in focus this morning Frantisek Taborsky , Francesco Pesole and Chris Turner There may still be room for further USD long-squeezing, and we remain reluctant to call the bottom in this dollar selloff just yet USD: Losing more ground The post-FOMC dollar selloff accelerated yesterday.
Markets remained concerned that the Federal Reserve may be reluctant to translate its price stability rhetoric into effective policy tightening. Combined with Fed Chair Kevin Warsh's ambiguity about the reaction function, this continued to weigh on USD, whose summer strength had been largely driven by Fed hike expectations. But other factors came into play yesterday.
Core PCE, the Fed’s preferred inflation gauge, rose only 0.1% month-on-month in June, while Q2 growth undershot expectations at 1.5% quarter-on-quarter annualised. Adding to the pressure was JPY intervention (more in the JPY section below), which triggered a more than 3% decline in USD/JPY and spilled over into broader USD sentiment. The DXY index, where the yen carries a 13.6% weight, briefly dipped below 100.0 and reached its lowest level since 17 June, when Warsh’s first Fed meeting sent the greenback higher.
Position-squaring likely amplified the move. Our estimate of aggregate USD net speculative positioning versus G9, based on CFTC data, showed the most stretched net-long USD positioning since January 2025 as of 21 July. At the same time, leveraged funds reported their largest EUR/USD short positions since 2021.
That suggests there may still be room for further USD long-squeezing, and we remain reluctant to call the bottom in this dollar selloff just yet. Any disappointment in US data should lead to a larger dovish repricing than before, particularly if oil prices come under renewed pressure. Fedspeak will also be crucial.
If dissenting votes become the new norm, off-meeting remarks from individual FOMC members are likely to receive greater scrutiny as markets assess voting intentions ahead of the next meeting. Francesco Pesole EUR: Better supported EUR/USD broke through 1.150 with little resistance yesterday as the dollar came under broad-based pressure. While the euro initially outperformed most G10 peers after the Fed announcement, it lagged behind yesterday despite stronger-than-expected Q2 GDP growth (0.4% QoQ) and hotter July inflation readings in Germany and Spain.
Sources & References
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