Dollar Faces Downside Pressure as Fed Hike Odds Fall

The US dollar is facing pressure due to softening inflation and labor data, despite being supported by geopolitical risks and a resilient economy.

According to Convera, the dollar's struggles to gain upside momentum have led to reduced expectations for a Federal Reserve interest rate hike in September, with odds falling from 70% to around 40%. This has weakened the dollar, as the rates channel has done significant work in FX recently.

Speculative dollar longs remain substantial, leaving room for further unwinds if data continue to disappoint. Japanese intervention is also a risk, although USD/JPY has rebounded somewhat since coordinated action from Tokyo and Washington.