The dollar is trading on firmer footing at the start of this week. With this round of large-scale JPY intervention on the books and a more balanced speculative positioning, a batch of soft US data is needed this week to add more pressure on the greenback. We see room for some USD recovery in the next couple of days
USD: Some upside risks this week
The dollar has found some support at the start of this week. This round of JPY intervention (which we analysed in detail here) may be over, lifting a key source of further downside risk for the dollar for the remainder of this week. Also, the positioning picture for USD is probably more balanced now compared to a week ago.
Our calculations based on CFTC figures show aggregate net-long USD speculative positioning vs reported G9 currencies (G10 excluding NOK and SEK) at almost 26% of open interest the day of July’s Fed meeting. That was slightly above the peaks of January 2025 and April 2024, and the most overbought the dollar had been since May 2019.
If position-squaring exacerbated the dollar selloff last week, we think further USD losses from here require a more compelling macro argument. That is, soft data justifying a new round of dovish repricing. Yesterday, ISM manufacturing surprised on the upside, with strong gains in the employment sub-index. For the rest of the week, focus is shifting firmly to the jobs market. Today, the focus is on JOLTS job openings for June, expected to have slowed to below 7.5m.
Unless ADP tomorrow and, more importantly, payrolls on Friday point to a clearly weakening jobs market (the 80k payroll consensus suggests the opposite), we do not expect the dollar to fall much further in the near term. Uncertainty over the next stage of US-Iran negotiations may also help limit downside pressure on oil prices. Markets may ultimately maintain pricing for a September Fed hike above 50% (currently 65%), and we keep a modest bullish bias on the dollar this week.
Francesco Pesole
EUR: Slightly overvalued
Our short-term fair value model suggests EUR/USD is modestly overvalued (around 0.5-1%) at current levels. It’s not a very strong directional signal, but does endorse our perception that EUR/USD needs help from a favourable shift in short-term rate differentials (i.e. dovish Fed repricing) to take another leap higher.
Our baseline for this week is for EUR/USD to edge back below 1.150 on a more supported USD, but unless US jobs figures come in particularly hot, we don’t see a return to 1.140 in the near term.
Francesco Pesole
NZD: Jobs data shouldn't derail hiking plans
New Zealand releases its 2Q labour market data tonight. High-frequency indicators point to only 0.1% QoQ employment growth, while unemployment is expected to edge up from 5.3% to 5.4%. That would broadly match the Reserve Bank of New Zealand’s May projections, which implied 1-2 hikes in 3Q. Since July’s hike, markets have continued to price around 20-25bp of tightening for the 2 September meeting.
We have long favoured a hike in either September or October, but our conviction around a September move has increased recently. The main reason is that markets may be overstating the scale of the tightening cycle, with 75bp priced in by February. We suspect two of the six policy committee members were not fully aligned with May’s hawkish shift, meaning the narrative may ultimately settle around a smaller 50bp "insurance" tightening cycle. If so, that would argue for an earlier move in September and then a pause.
NZD has been one of the stronger performers since the Fed meeting, clearly outpacing AUD after the latter suffered a sharp dovish repricing following a soft CPI release. NZD/USD may remain around the 0.585-0.590 range for now, but a September hike delivered with a slightly dovish tone could prompt some correction and open the door to a period of AUD outperformance relative to NZD. Our year-end target for NZD/USD is currently 0.59, though 0.60 is looking increasingly attainable.
Francesco Pesole
CEE: Rates relief has further to run
Markets opened on a positive note, as expected, following weekend headlines from the Middle East, with rates markets outpricing rate hikes. FX, however, remained sidelined at the start of the week, with limited movement. Market pricing now implies around two CNB hikes over the next 18 months, a little more than one hike in Poland and around three rate cuts in Hungary. We continue to expect rates to remain unchanged in the Czech Republic and Poland, while the Hungarian central bank is likely to deliver more cuts than currently priced in.
Rates, therefore, have more scope to rally if the global backdrop remains supportive. In the Czech Republic and Hungary in particular, inflation prints and this week’s CNB meeting should provide additional support. Yesterday’s moves largely tracked core markets, with little change in rate differentials. Our views from yesterday are unchanged: a stronger zloty and forint should benefit from global relief, while the koruna is likely to underperform on a dovish interpretation of this week’s CNB meeting.
Frantisek Taborsky
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