FX Daily: Dollar Hits Post-FOMC Perfect Storm

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

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.

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.

Eurozone-wide inflation data is out today, with consensus expectations at 2.9% for headline and 2.4% for core. Still, upside room for front-end EUR rates looks somewhat contained at this stage. With a September hike from the European Central Bank largely priced in, markets will likely need a stronger signal from either oil prices or inflation to return to pricing 2.75% by year-end.

We think the sharp shift in USD momentum leaves near-term risks tilted to the upside for EUR/USD. Some stabilisation may be seen today, but next week’s packed US calendar can provide fresh catalysts. At this stage, we would not view a move above 1.160 as very sustainable unless markets repriced USD rates materially lower again and Middle East tensions eased. Still, EUR/USD may continue to find buyers around the 1.150 level for a while longer.

JPY: Swimming against the tide

USD/JPY has been on a rollercoaster, falling 3% yesterday on Japanese intervention, only to bounce back near 2% overnight. The Nikkei reported that Japanese authorities did indeed intervene yesterday and that the Fed, as it did in January, also checked rates yesterday afternoon.

Back in January, the Fed checking USD/JPY rates on behalf of the US Treasury was a big story which reflected the co-ordinated nature of intervention and the shared concern by the US and Japan over the weak yen. However, the story has moved on now, and we would need to see some own-account intervention from US authorities to give USD/JPY another leg lower.

We could well see some more Japanese FX intervention today and early next week, since intervention typically comes in blocks of a few days. But until we get a clearer signal that the Fed is not going to hike in September and the broader dollar trend clearly turns lower, intervention can only slow rather than reverse the underlying USD/JPY bull trend.

CEE: Forint and zloty find more room to rally

Yesterday’s Q2 GDP releases in Hungary and the Czech Republic came in slightly below expectations but still pointed to relatively resilient growth. In the Czech Republic, however, GDP was well below the Czech National Bank's forecast, triggering dovish repricing and leaving the koruna underperforming CEE peers despite the broader EM FX rally after the US dollar weakened.

Today’s focus shifts to Poland’s July inflation print, where we expect a rebound from 2.5% to 3.1%, mainly reflecting the unwinding of government measures that previously capped fuel prices. The release should offer an early signal for next week’s regional inflation data, while also keeping NBP rate-cut discussions in focus after they were opened at the last meeting.

The forint and zloty rallied yesterday, in line with our view after Wednesday’s Fed meeting and the weaker US dollar. With no new Middle East headlines and the dollar weakening further, we think both currencies have more room to gain, while the koruna should keep underperforming ahead of next week’s CNB meeting.