G10 FX Week Ahead: Dollar Unlikely To Step Off The Podium

In the final week of the Olympics, we think the dollar will at least be able to stabilise after the recent correction. The prospect of the Fed’s tapering should be cemented by good payrolls, while global risk assets may still struggle to look past China’s regulatory clampdown. Elsewhere, the BoE and RBA should not deliver any new guidance

USD: Too early to call for a turnaround in dollar’s strength



Week ahead bias Range next week 1 month target



Neutral 91.4000 - 92.5000 93.0000
  • After a week where the Fed made another step towards tapering and the Chinese government’s regulatory clampdown generated a risk-off wave that spread across Asian and global markets, one would expect to see a stronger dollar across the board. In fact, the dollar is on track to have the worst week of 2021, as it lost ground against all G10 currencies. Indeed, US real yields touched record lows but real-rate differentials have not proved to be a determining factor for FX moves since markets have turned more sceptical about the global recovery story. The main trigger for the dollar correction was Powell’s post-FOMC press conference, where he still sounded cautious about the recovery, but we doubt such comments (which were a mere reiteration of his recent rhetoric) were enough to dent expectations that the Fed will soon (we think in Jackson Hole in late August) announce the timeline for asset purchase reductions or enough to force a price-out of rising expectations around a 2022 rate hike. Instead, the dollar correction appeared to be mostly a profit-taking event, with markets that had already priced in the extra bit of hawkishness at the July FOMC and cashed in on some long-dollar positions. 
  • In the week ahead, some key data for July will tell us at what pace the US economy has continued to recover, but it’s worth keeping an eye on debt-ceiling discussions in Congress and the potential impact on the US money market. Our economists expect the ISM surveys to keep reporting strong demand, but once again highlight the constraint on the supply side. The other main release, the July jobs report, should see employment gains at around 900k according to our estimates, which is largely in line with consensus and should underpin the notion that the labour market is on a solid recovery path. On balance, next week’s dataflow should allow markets to cement their Fed tapering expectations. When combined with a global recovery sentiment that remains mixed and the material risk of more equity shocks coming from China – which are likely to have already exacerbated portfolio outflows from emerging markets – we think it is too early to call for the end of the dollar’s recent good momentum and we expect the greenback to find at least a fairly solid floor in the week ahead. 

EUR: Stabilising after the rebound



Week ahead bias Range next week 1 month target



Neutral 1.1770 - 1.2000 1.1800
  • The cautious Fed offered some helping hand to EUR/USD and with the subsequent USD softness facilitated the EUR/USD rise to the 1.1900 level. However, we see any upside to EUR/USD as limited. The cautious July FOMC meeting is now in the price and although the Fed doesn’t appear to aim to disrupt markets, it will nonetheless be ahead of the ECB in terms of the monetary policy normalisation. In contrast, the conclusion of the ECB strategy review does point towards a very cautious ECB that should keep the policy ultra-accommodative for a prolonged period of time. From this perspective, higher-than-expected eurozone 2Q GDP and June EZ CPI released today should not affect the EUR much – given that the dovish ECB bias is very clear.
  • Domestically, it will be a very quiet week on the EZ data front. June retails sales (Wednesday) won’t have much of an effect on the euro.
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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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