HSBC: USD Pullback Looks Increasingly Fundamentals-Driven - FJElite

The recent pullback in the broad USD looks justified given the softer June US labour market report and Warsh’s more relaxed view on inflation. Even though he said he wanted to avoid forward guidance, his comments still leaned that way, framing inflation as less threatening in both the short term and potentially the medium term, including through the idea that AI could be disinflationary.

The broader point is that the dollar now appears to be trading more on fundamentals again. For months, that was less clear because US data were distorted by government shutdowns and overshadowed by policy and Middle East uncertainty. That backdrop has now changed, making the USD more sensitive to relative yield moves. DXY is moving more in line with its weighted rate differential, even if some pairs, especially EUR/USD, still look rich versus what nominal and real rate spreads would imply.

This week’s main Fed focus is the FOMC minutes. They should give more detail on the internal split, with nine of 18 members looking for higher rates by year-end and the other half favouring unchanged or lower policy. The market impact will depend on which side of that argument comes through more convincingly, though the bar looks high for the doves given that the meeting itself was still read as a hawkish hold.