DXY Expected to Retreat as Inflation Data Shows Slowdown and Fed Concerns Rise

Elias Haddad from Brown Brothers Harriman (BBH) believes that the US Dollar Index (DXY) has reached its peak and will soon retreat to a range of 96.00-100.00.

This prediction comes after a sharp sell-off in the dollar, which some attributed to suspected USD/JPY intervention. However, Haddad argues that the broader USD rally since May has likely ended due to softer US inflation data and concerns about the Fed's monetary policy.

The June PCE data showed a slowdown in inflation, with headline PCE falling -0.1% m/m compared to +0.4% in May. The annual rate also eased to 3.7% vs. 4.1% in May, which is below the Fed's projection of 3.6%. Despite this, US Q2 real GDP growth underwhelmed at 1.5% SAAR, but domestic demand activity remains solid.

Haddad highlights that the failure to contain inflation risks the Fed falling behind the curve in tightening monetary policy. He also notes that relying on markets to do the tightening instead of acting itself can create a credibility gap for the central bank.