FUNDAMENTAL FORECAST FOR THE US DOLLAR: NEUTRAL

DOLLAR TALKING POINTS:

• US Dollar accelerated upward after hawkish FOMC policy decision
• July’s CPI data expected to reinforce status-quo Fed rate hike view
• Absence of new near-term catalysts may open the door for a pullback

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The US Dollar accelerated upward last week, powered by a hawkish Fed monetary policy announcement (as expected). Central bank officials upgraded their assessment of overall growth, employment and inflation to signal that two more rate hikes are probably on the docket before year-end.

On the data front, the spotlight now turns to July’s CPI report. The headline and core inflation measures are expected to register unchanged from the prior month at 2.9 and 2.3 percent on-year respectively. Such results would be broadly consistent with the Fed’s confident posture.

While this is supportive of the greenback’s overall uptrend, it may fall short of offering sufficient impetus to drive near-term gains. Indeed, even after last week’s hawkish FOMC statement, the priced-in probability of a December hike barely budged from 60 percent.

This hints the US unit may need more than just reinforcement of the status quo to sustain upward momentum. On-going trade war tensions between Washington and Beijing may offer a catalyst. If escalation triggers risk aversion, the currency’s unrivaled liquidity may re-establish support from haven-seeking capital flows.

External developments ought to be kept in mind as well. Crosscurrents following the RBA and RBNZ rate decisions via AUD/USD and NZD/USD might echo as drivers of USD more broadly in the absence of other influences. Dovish outcomes on both fronts might mean such forces are nominally helpful.

These considerations aside, the absence of fresh fodder locally might translate into a consolidative tone. CFTC positioning data reveals a steep build in speculative net-long US Dollar exposure recently, opening the door for profit-taking that breaks the currency’s four-week winning streak.