Dollar Bulls Face Hawkish Backlash at Upcoming FOMC Meeting

Dollar bulls have taken on substantial long USD positions ahead of the FOMC meeting, encouraged by Brent's sharp rebound and expectations of a surprise rate hike by Chairman Kevin Warsh. However, DBS Bank's Philip Wee notes that markets may be overpricing hawkishness, as softer US data and recent pullbacks in Brent and US Treasury yields temper the outlook for further tightening.

The rebound in Brent crude from $70 to $100 in the first three weeks of July prompted dollar bulls to accumulate long USD positions, betting on a surprise rate hike at the FOMC meeting. However, skeptics believe that these USD bulls have overpriced such hawkishness, relying too heavily on volatile energy prices rather than data.

While US Treasury 10-year yields did ease, hawks limited the decline to 4.60%, brushing aside the weakening US economic outlook. With Chairman Warsh's promise of 'honest discussion' with his Fed colleagues and commitment to end forward guidance, there is a risk that speculators may have to lighten their long USD positions if today's FOMC meeting does not turn out hawkish enough.