USD Strength Driven by Massive Carry Trade Ahead of Crucial Inflation Data
The US dollar's dominance in global markets is being driven by the massive USD/JPY carry trade, which has put even more emphasis on tomorrow's Core PCE report. Market expectations are for inflation to match last month's 3.3% print, with lower-than-expected rates bringing the prospect of USD/JPY pullbacks and diminished expectations for 2026 rate hikes.
According to James Stanley, Senior Market Analyst at Global Macro, 'the one thing that is certain is that austerity and slower spending doesn't seem to be on the cards for the US.' With a maturity wall of Treasury debt coming due, US Treasury Secretary Scott Bessent has his work cut out for him.
The market's focus is back on data, which will further build out rate expectations. The probability of a rate hike from the Fed by the end of the year remains high at approximately 73%. However, if slower inflation brings those odds down, it could hit the USD, given its heavy influence on Dollar price action.