USD Still Has Strength to Push Higher as EURUSD Begins to Turn Bearish

Recent developments, including a more dovish tone from the Federal Reserve, softer US survey data, and below-expectation payrolls, prompted significant adjustments in US rates and the USD. The initial anticipation of potential rate hikes shifted as market sentiment turned towards a more cautious outlook, leading to a re-evaluation of USD positions. While USDJPY intervention played a role, it was primarily the disappointing US data releases that fuelled the downward movement.

USDJPY H1 Chart

Towards the end of the week, USD selling was predominantly a result of trimming positions rather than a widespread move towards shorting, with notable exceptions like demand for BRL. Despite continued USD weakness, traders remained cautious about the sustainability of these trends, particularly in the context of thin holiday trading.

While last week's developments offered a brief respite, Goldman Sachs research team says that they maintain a cautious stance, projecting a stronger dollar in the long run. Limited divergence and a decreased FX carry buffer heighten the susceptibility of emerging market currencies to potential hawkish US policy shifts.

Japan's recent actions highlight the global attention on US policy decisions, with policymakers worldwide adjusting their strategies accordingly. Additionally, shifts in the People's Bank of China's USDCNY fix suggest a potential change in dynamics, contributing to stability in USD/NJA pairs. Interest in buying USDCNH topsides across various maturities remains robust among macro traders. 

USD Index H1 Chart 

Looking ahead, a light US data calendar places emphasis on Fed speakers, while market attention turns to the Bank of England's communication for potential policy insights. Changes in inflation projections, voting patterns, and Governor Bailey's tone during the press conference will be closely monitored for clues regarding future rate adjustments. In the emerging market space, central bank meetings in CEEMEA and Latam, particularly in Brazil and Peru, will be scrutinized for potential policy shifts.

BoE Rate Decision 

Insights Inspired by Goldman Sachs (FX Morning Thoughts): Credit to Their Analysis for Shaping Some Aspects of This Text

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