ING FX Daily - FJElite:

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

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.

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.