Dollar Under Pressure as Markets Focus on Fed

The US dollar has been under pressure despite various factors supporting it, such as geopolitical risks and higher oil prices. However, since peaking in June, the dollar has struggled to generate sustained upside, and markets appear increasingly focused on the Federal Reserve rather than geopolitics.

Softer inflation data, weaker payrolls, and a declining US Economic Surprise Index have weighed on the dollar of late. This has eroded Fed tightening wagers, with September hike odds falling from around 70% to closer to 40%. With the rates channel doing a lot of heavy lifting in FX of late, this has weakened the dollar.

Questions around Fed credibility have also not disappeared, with Chair Warsh's reluctance to provide clear forward guidance and reports of regular contact with President Trump reviving concerns about Fed independence. Positioning also warrants attention, with speculative dollar longs remaining substantial despite recent reductions.