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Brown Brothers Harriman’s (BBH) Elias Haddad notes that the Dollar stabilized after a sharp sell-off linked to suspected USD/JPY intervention, but argues the broader USD rally since May has likely ended, with US Dollar Index (DXY) expected to move back into a 96.00–100.00 range. Haddad highlights softer US inflation data, solid domestic demand, and concerns that Fed Chair Kevin Warsh may fall behind the curve.

DXY expected to retreat from highs

"We believe the USD rally from May has run its course, with DXY poised to retreat back into a 96.00-100.00 range. The tailwind to USD from resilient US economic activity is outweighed by Fed Chair Kevin Warsh failure to turn tough inflation rhetoric into a credible policy, increasing the risk the Fed falls behind the curve in containing inflation."

"The June US PCE data was reassuring. However, Warsh risks a credibility gap by relying on markets to do the Fed’s tightening instead of acting itself."

"US June PCE largely matched consensus, confirming the slowdown in inflation already signaled by the June CPI and PPI data two weeks ago. Headline PCE fell -0.1% m/m vs. +0.4% in May due to lower gasoline price, while the annual rate eased to 3.7% vs. 4.1% in May (FOMC 2026 projection: 3.6%)."

"US Q2 real GDP growth underwhelmed but details show domestic demand activity is rock solid. Real GDP rose 1.5% SAAR (consensus: +2.0%) vs. 2.1% in Q1."

"The US Q2 Employment Cost Index (ECI) is today’s data highlight (1:30pm London, 8:30am New York). ECI wages & salaries - the Fed’s favorite wage data – was 3.4% y/y in Q1 consistent with the Fed’s 2% target given average annual labor productivity growth of 2.1%."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• AUD/USD trades around 0.7030 on Friday, little changed on the day after reaching its highest level since mid-June.
• Weak official Chinese PMI data caps the Australian Dollar's upside, while the softer US Dollar limits downside pressure.
• Markets continue to price in Fed tightening, while expectations of another RBA rate hike have faded significantly.

AUD/USD trades around 0.7030 at the time of writing on Friday, little changed on the day after Thursday's strong rally. The Australian Dollar (AUD) continues to draw support from the persistent weakness in the US Dollar (USD), although the latest Chinese economic data is limiting the pair's upside potential.

Data released on Friday showed that China's manufacturing sector slipped back into contraction in July. The NBS Manufacturing Purchasing Managers Index (PMI) fell to 49.2 from 50.3 previously, missing market expectations of 50. Meanwhile, the Non-Manufacturing PMI declined to 49, also below forecasts. The figures highlight slowing activity in Australia's largest trading partner, a development that is generally negative for the Australian Dollar.

At the same time, the US Dollar remains under pressure after data released on Thursday showed that the United States (US) Gross Domestic Product (GDP) expanded by just 1.5% in the second quarter, down from 2.1% in the first quarter and below the market consensus of 2.1%. The weaker growth reading continues to weigh on the Greenback.

However, Australia's monetary policy outlook has shifted in recent days. While markets had previously expected another interest rate hike this year following hawkish comments from Reserve Bank of Australia (RBA) Governor Michele Bullock, the latest second-quarter inflation data has virtually ruled out a rate increase at the August 11 meeting. This reassessment of policy expectations is now limiting further gains in the Aussie despite the ongoing weakness in the Greenback.

Australia CPI eases RBA hike risks

Analysts at Deutsche Bank highlight that the latest Australia inflation print came in softer than expected, with “Australia’s consumer price index (CPI) rose +0.6% qoq in Q2 (vs. +0.7% expected and +1.4% in Q1), supported by easing fuel prices.” They note that headline price pressures continued to cool on an annual basis as “annual inflation moderated from +4.0% to +3.8% yoy.”

While underlying inflation showed a marginal uptick, Deutsche Bank stresses that “annual core inflation edged up from +3.5% to +3.6%, but remained below the consensus estimate of +3.7%, reducing the urgency for additional interest rate hikes after the RBA already raised rates three times this year.” In rates markets, they point out that “following the release, yields on 2yr Aussie government bonds are down -8.3bps to 4.49%, with markets paring back the chance of a rate hike next month to just 2%, from 18% previously.”

TD Securities strategists expect Canadian real Gross Domestic Product (GDP) to rise by 0.2% m/m in May, exceeding the flash estimate and extending April’s 0.5% gain. They highlight balanced growth across goods and services, with manufacturing, existing home sales and retail trade all contributing. Labour market strength underpins the outlook, while June GDP is seen moderating after a strong start to Q2.

Canadian growth seen moderating after Q2 surge

"We expect real GDP to rise by 0.2% m/m in May to exceed flash estimate for +0.1% and build on last month's 0.5% increase, with balanced growth across goods and services."

"Manufacturing will provide a source of strength for the goods sector as services receive a tailwind from a sharp increase for existing home sales alongside the rebound in retail trade."

"Labour market conditions also support another stronger performance in May, with a large increase in hours worked alongside the sharp pickup in job creation."

"This report will also provide new flash estimates for industry-level GDP in June where we look for some moderation after the strong start to Q2."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• The Indian Rupee rallies further against the US Dollar as the latter continues to underperform.
• Investors doubt whether the Fed will hike interest rates to lower inflation.
• The RBI is expected to keep policy rates steady next week.

The Indian Rupee (INR) extends the week-long rally against the US Dollar (USD) on Friday. The USD/INR pair slides to a fresh over two-week low near 95.30 due to the overnight slump in the US Dollar amid growing doubts regarding whether the Federal Reserve (Fed) is seriously committed to bringing the United States (US) inflation down. The Indian currency is up 1%from its previous weekly close at 96.40.

At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher to near 100.00; however, it fell almost 0.9% on Thursday to near 99.86.

Investors doubt Warsh will consider rate hikes to tame inflation

According to analysts at ING, "Looking at the market’s reaction [to the Fed’s press conference], the conclusion was that the Fed was not going to be as tough on fighting inflation as initially thought."

In the policy conference, Fed Chair Kevin Warsh maintained the rhetoric and refused to provide so-called "forward-guidance" on interest rates. However, Warsh said that the central bank will do necessary monetary policy adjustments to combat hot inflation. “Committee remains resolute to deliver price stability, and we will not hesitate to act,” Warsh said.

Elevated oil prices could limit INR’s upside

Oil prices remain higher due to fears of prolonged energy supply constraints amid the ongoing exchange of attacks between the US and Iran, which are expected to limit the upside in the Indian Rupee.

The war between both nations is unlikely to pause anytime soon as Iran continues to demand the recognition of its authority on the Strait of Hormuz. Meanwhile, Iran-aligned Houthis’ intentions to monetize the Bab el-Mandeb Strait, a key link between the southern Red Sea and the Gulf of Aden, are also worsening Middle East tensions.

According to strategists at TD Securities, ongoing disruptions and supply constraints are tightening the global energy balance, with the bank highlighting that “we continue to see reduced flows and global tightening of the energy market as supportive of further upside in crude oil.” This assessment underscores their view that constrained supply dynamics remain a key pillar for potential additional gains in crude prices, even as positioning among some systematic players remains cautious.

Currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, tend to underperform in a high oil price environment.

RBI to keep policy rates steady next week

Going forward, the major trigger for the Indian currency will be the Reserve Bank of India’s monetary policy announcement on August 5.

Analysts at Commerzbank expect the Reserve Bank of India to maintain a steady policy stance at its upcoming meeting, noting that the RBI is “expected to leave the benchmark repurchase rate unchanged at 5.25% at its next meeting on 5 August.” They acknowledge that “inflation risks remain tilted to the upside due to higher global commodity prices and a weaker monsoon season,” but point out that the latest June CPI print “rose 4.4% yoy, which was within RBI's 2-6% target range,” reinforcing the case for policy continuity.

Technical Analysis: USD/INR stabilizes below 20-day EMA

USD/INR extends the decline to near 95.30 on Friday, maintaining a bearish near-term tone as it holds below the 20-day Exponential Moving Average (EMA) at 95.81.

The pair’s inability to reclaim this dynamic resistance suggests rallies remain capped for now, while the Relative Strength Index (RSI) near 44 hints at weakening momentum after the recent advance, reinforcing the risk of further consolidation or downside probes.

On the topside, initial resistance is defined by the 20-day EMA around 95.81, and a daily close above this barrier would be needed to reclaim the 96.00 level. On the downside, the pair is expected to extend the decline toward the July 7 low at 94.80.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

• The US Dollar Index clings to gains above 100.00 on Friday after a 1.5% selloff following the Fed's monetary policy meeting earlier this week.
• Analysts observe that the lack of forward guidance by the central bank is likely to hurt confidence in the US Dollar.
• Experts at DBS Bank assess that the diverging communication styles of the ECB and the Fed will keep USD under sustained downward pressure.

The US Dollar Index (DXY) attempts to cling above the 100.00 psychological level on Friday after a nearly 1.5% selloff in the previous three days, as the Federal Reserve's (Fed) lack of forward guidance at Wednesday's monetary policy meeting raised concerns that the bank might fail on its commitment to fight inflation. Experts from some of the world's major commercial banks agree that this stance might trigger a long squeeze of global USD positions in the coming weeks.

Analysts at ING report that the post-FOMC Dollar selloff accelerated amid market concerns that the Fed “may be reluctant to translate its price stability rhetoric into effective policy tightening.” They observe that Fed Chair Kevin Warsh’s ambiguity is weighing on USD, whose recent “summer strength had been largely driven by Fed hike expectations.”

In ING’s view, “there may still be room for further USD long-squeezing,” as they remain reluctant to call the bottom in this dollar selloff just yet. The bank warns that “any disappointment in US data should lead to a larger dovish repricing than before, particularly if oil prices come under renewed pressure,” adding that upcoming “Fedspeak will also be crucial” in shaping the next leg for the Dollar.

Commerzbank experts warn about a dovish pivot and rate cuts in 2027

Analysts at Commerzbank argue that the US Dollar strength is unlikely to prove durable, warning that “the dollar is likely to be under pressure again after the end of the war with Iran because the Fed is unlikely to raise rates as markets have priced in.” Instead, they expect a decisive policy pivot, stating that “the Fed is likely to embark on pronounced and ultimately excessive interest rate cuts again in 2027, also because of the political pressure.” In their view, this prospective shift in Fed policy compounds an already fragile valuation backdrop, as “the dollar is vulnerable because it is significantly overvalued based on purchasing power parity.”

Strategists at DBS Bank remark that “our caution paid off,” as the USD “sank after the FOMC meeting did not turn out hawkish enough to deliver a Fed hike yesterday or to affirm one in September.”

In their view, the softer tone from the Fed, combined with what they describe as a “stark divergence in central bank communication,” now “threatens to keep the greenback under sustained downward pressure.” DBS contrasts the Fed’s approach with that of the European Central Bank, noting that “while Warsh leaves US markets stumbling in the dark, the European Central Bank was more unified in flagging a September rate hike, handing the EUR a distinct comparative advantage.”

ING’s Francesco Pesole notes the Dollar’s post-FOMC selloff has accelerated, with DXY briefly dipping below 100.0 and returning to levels seen after Kevin Warsh’s June press conference. He highlights stretched net-long USD positioning versus G9 and large EUR/USD shorts. Pesole warns further USD long-squeezing is possible and remains reluctant to call a bottom in this Dollar selloff.

USD pressured by dovish Fed repricing

"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, 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."

"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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• EUR/JPY rebounds toward 184.00 following the Bank of Japan's monetary policy decision.
• The Bank of Japan keeps its policy rate unchanged at 1% while making slight adjustments to its economic forecasts.
• Stronger-than-expected Eurozone inflation provides additional support to the Euro.

EUR/JPY trades around 184.00 on Friday, stabilizing after the sharp volatility seen on Thursday. The cross plunged to near 182.00 from around 187.00, losing almost 500 pips within minutes after what appears to have been another intervention by Japanese authorities in the foreign exchange market. The Bank of Japan (BoJ) monetary policy decision is now helping to calm markets and support a moderate rebound in the pair.

As widely expected, the Bank of Japan (BoJ) left its short-term interest rate unchanged at 1% at the conclusion of its July policy meeting. The central bank slightly upgraded its fiscal 2026 real Gross Domestic Product (GDP) growth forecast to 0.6% from 0.5% previously, while lowering its fiscal 2026 core Consumer Price Index (CPI) forecast to 2.5% from 2.8% in April. The institution also highlighted the Middle East conflict as a key risk to the economic and inflation outlook, a factor that continues to weigh on the Japanese Yen (JPY).

The decision was approved by an 8-1 vote. Board member Hajime Takata was the sole dissenter, arguing in favor of another interest rate hike as he believes geopolitical tensions could generate more persistent inflationary pressures through higher energy prices and stronger demand.

Meanwhile, Japanese Finance Minister Satsuki Katayama reiterated that the authorities remain ready to intervene in the foreign exchange market at any time and confirmed that Japan continues to coordinate closely with the United States (US) on currency developments. These comments keep the risk of further intervention alive following Thursday's sharp market swings.

On the European side, the latest inflation figures are supporting the Euro (EUR). The Eurozone Harmonized Index of Consumer Prices (HICP) accelerated to 2.9% YoY in July, in line with expectations, while core inflation rose to 2.5%, above the 2.4% consensus. The data points to persistent underlying inflationary pressures.

European Central Bank (ECB) Governing Council member Martin Kocher also said that future monetary policy decisions will remain fully data-dependent. He noted that recent geopolitical developments have demonstrated how quickly energy prices can alter the inflation outlook, leaving investors focused on upcoming macroeconomic releases.

BoJ holds at 1% as Ueda turns hawkish but TD stays dovish on hike path

According to TD Securities, the BoJ “left the target rate unchanged at 1% (cons/TD: 1.0%) in an 8-1 vote after its 25bps hike last month,” in a decision that was “widely expected.” The bank notes that Governor Ueda “sounded the most hawkish that he's been in a long while,” coming “just close to short of forward guidance that September is a done deal for a 25bps hike.” TD highlights that “he repeatedly referenced the discussion of potential rate hikes and the impact of a weaker yen, which reads hawkish to us.”

Even so, TD stresses that “we are more dovish than market pricing; OIS markets are close to fully pricing in a hike in October” and that they “forecast the next 25bps in December 2026 (semi-annual pace of hikes).” The bank flags that “a risk to our forecast is that the JPY slides past the 165 level and a hike in October is needed to mitigate the FX impact.”

TD Securities’ Alex Loo notes that despite Governor Ueda’s hawkish tone, the Japanese Yen reaction was muted and the BoJ kept its policy rate at 1%. The bank expects the next 25 bps hike only in December 2026 and sees USD/JPY trading in a broad 158–163 range in coming weeks, with intervention risks if USD/JPY moves above 162.

USD/JPY seen in broad range

"Traders are likely to be wary of follow-up intervention efforts given JPY's muted reaction. We see USD/JPY in a wide trading range in coming weeks."

"With OIS markets close to fully pricing an October hike, and 29bps by year-end, there is little that BoJ can do to jolt the JPY stronger, unless the BoJ delivers 2 hikes in the second half of 2026."

"The ball is now back in the government's court to address the weakness in JPY. The JPY has erased more than half of its intervention gains, bouncing off the 200dma at 158 overnight and the MoF may step in again post-BoJ if USD/JPY reverts to > 162 level."

"We think USD/JPY is likely to trade in a 5 big figure range (158-163) in the coming weeks as the USD may stay supported from hawkish FOMC dissents. Absent a material slump in US data, we believe any USD sell-off will be limited."

"It is clear verbal jawboning no longer influences JPY price action as effectively in 2026 and more forceful and imminent actions would likely be required to curb the prevailing bearish JPY bias."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)