USD Sold Off As Market Continues To Reprice The Fed

OVERVIEW : Monday, August 17th, 26’

Markets remained cautious as US-Iran headlines kept the geopolitical backdrop highly fluid, with conflicting signals around the 60-day truce and the Strait of Hormuz. Reports of progress between Iran and Oman on managing shipping through Hormuz offered some relief, but this was offset by Iran signalling a shift toward a “fully offensive” policy and Trump warning of further military action. Iran also said it had not decided to resume talks with the US, leaving the diplomatic outlook unclear. Crude prices were choppy early but ultimately firmer with WTI $85bl and Brent $93bl, with the conflicting geopolitical headlines driving price action. The prospect of an Oman agreement over Hormuz provided some downside pressure, but renewed escalation concerns and uncertainty around the truce kept a geopolitical premium in oil. Precious metals ultimately firmer on the back of the soft USD, before DXY pulled back in US session given harsh rhetoric stated above.

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US DOLLAR

USD was weaker through most of the sessions as markets continued to reprice the Fed toward a less hawkish path, with September hike expectations now around 30% following the recent softer US data. The Dollar extended Friday’s decline despite relatively firm Treasury yields and elevated oil prices. USD firmed into the close as crude extended higher, with renewed US-Iran tensions and uncertainty around the Strait of Hormuz keeping the geopolitical and inflation risks elevated. The late recovery in the Dollar therefore reflected a combination of higher energy prices and defensive demand, although the broader policy repricing remains a headwind.

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EURO

EUR had choppy price action at the margin, with a general lack of demand for the single currency limiting attempts to build on recent gains. The absence of a clear Euro-specific catalyst left price action largely flow-driven, with EUR unable to establish a sustained direction.

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GREAT BRITISH POUND

GBP saw choppy price action through the session, ultimately closing flat on the day as traders remained cautious ahead of a heavy UK data week. Softer Rightmove house prices added little conviction, with attention now firmly on Tuesday’s jobs report, followed by Wednesday’s inflation data and Friday’s retail sales.

Data:

  • UK Rightmove House Prices MM (Aug) -2.0% (Prev. -1.0%)
  • UK Rightmove House Prices YY (Aug) -1.0% (Prev. -0.4%)


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AUSTRALIAN DOLLAR

AUD outperformed on the day, supported by the broader USD weakness as Fed tightening expectations continued to ease, with September hike pricing now around 30% versus roughly 50% last week. The softer US rate backdrop also improved the risk tone and supported high-beta currencies. Weaker-than-expected Chinese activity data, which missed across the board and reinforced expectations for further policy support from Beijing. Despite the China headwind, the softer USD and improved risk environment remained the dominant drivers for AUD on the day.

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CANADIAN DOLLAR

CAD took a breather after its firm performance last week, with the currency seeing some modest downside on the day. Firm oil prices helped limit the pullback, keeping the broader commodity backdrop supportive despite the softer price action. Hotter-than-expected Canadian CPI had little impact on the Loonie, with headline CPI rising to 3.0% Y/Y and core measures also accelerating. The limited reaction suggests the inflation surprise was largely absorbed, leaving CAD primarily driven by oil and broader market flows.

Data:

  • Canadian CPI (Jul MM) 0.5% vs. Exp. 0.4% (Prev. -0.4%).
  • Canadian CPI (Jul YY) 3.0% vs. Exp. 2.9% (Prev. 2.8%).
  • Canadian Core CPI (Jul MM) 0.2% (Prev. 0.1%).
  • Canadian Core CPI (Jul YY) 2.3% (Prev. 2.1%).


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NEW ZEALAND DOLLAR

NZD was firm for most of the day, supported by the broader risk-on tone and weaker USD, with stronger domestic activity data adding to the constructive backdrop. Electronic card retail spending rebounded 1.3% M/M in July, while the services sector returned to expansion in June. The Kiwi gave back some of its gains later in the session as oil prices extended higher, with the rise in energy prices weighing on risk-sensitive currencies and limiting the earlier recovery.

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JAPANESE YEN

JPY sold off through the session as the combination of the wide yield disadvantage, weaker-than-expected GDP and a broader risk-on environment kept pressure on the currency. Q2 GDP rose just 0.3% Q/Q versus 0.5% expected, while annualised growth slowed to 1.1% from 1.8%, weakening the case for an imminent BoJ hike. Despite the softer growth data, markets continue to lean toward a September BoJ hike, limiting the extent of the Yen’s downside. For now, however, the relative yield backdrop and risk-on conditions remain the dominant drivers.

Data:

  • Japanese GDP Growth Rate Prel (Q2 QQ) 0.3% vs. Exp. 0.5% (Prev. 0.5%)
  • Japanese GDP Growth Annualised Prel (Q2) 1.1% vs. Exp. 2% (Prev. 1.8%)


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SWISS FRANC

CHF caught some bids on the back of broader USD weakness, with the Franc finding support as US rate expectations softened. However, the move lacked follow-through and CHF ultimately closed flat on the day.