Where we are: The DXY is currently trading at 97.79, down 0.41% on the day, having traded in a range of 97.48 to 98.22 so far. This represents a significant break below the 98.00 level, and extends the decline from yesterday’s close as risk sentiment improves. The Greenback is testing fresh intraday lows as traders price in a potential shift in geopolitical dynamics.
What’s driving it: The primary driver behind the Dollar’s weakness appears to be growing optimism regarding a potential US-Iran deal and reduced Middle East tensions. This has spurred a drop in oil prices and, consequently, eased inflation concerns that were previously supporting the Greenback. The Fed remains in a patient hold, conditional on continued disinflation; the next meeting is tomorrow. Data dependency keeps the door open, but requires data that does not seem imminent.
- The 10Y Breakeven Inflation rate fell 3bp yesterday, suggesting easing price pressures.
- Speculator positioning in the Dollar remains crowded long at the 92nd percentile, heightening the risk of a squeeze on any further negative news or data disappointments.
- Renewed speculation of possible intervention by Japanese authorities is contributing to Yen strength, indirectly weighing on the DXY.
NY session focus: All eyes will be on the 08:15 ET release of the ADP Non-Farm Employment Change. A print significantly above the 118K forecast could provide a temporary bounce for the Dollar, while a miss would likely exacerbate the current downtrend. Key levels to watch are 97.50 as initial support and 98.25 as resistance on any retracement. The trade that’s working right now is short USD vs. high-beta currencies, while long USD positions are clearly at risk. The pain trade would be a hawkish surprise from tomorrow’s FOMC meeting pressuring the committee for further hawkish action.