FX OVERVIEW
The dominant theme is broad-based US dollar weakness, driven by deteriorating confidence in US fiscal credibility, falling Treasury yields after the long-dated buyback expansion, and reduced expectations of a near-term Fed hike. Geopolitical escalation around Iran and the Strait of Hormuz is lifting oil and creating intermittent safe-haven demand for the dollar, but that support is being outweighed by structural selling, particularly against the euro, sterling, Swiss franc, and Singapore dollar.
MAJOR PAIRS
EURUSD — EUR/USD rallied to a three-month high near 1.1700 as the Treasury’s decision to double long-dated bond buybacks to $4 billion per operation drove a sharp fall in long-end yields and weakened the dollar. The pair has cleared the 200-day SMA, the 61.8% Fibonacci retracement, and 1.1600; sustained trade above 1.1600 keeps the bullish bias intact, with resistance and targets at 1.1725 and 1.1800. Overbought RSI readings near 73–78 argue for consolidation risk, not a reversal of the broader trend.
GBPUSD — Sterling remains supported by the sharp decline in the implied probability of a September Fed hike, from 47% to 32.7%, while the BoE retains a more cautious-to-hawkish policy profile. GBP/USD trades near 1.3610 above its key moving averages and is testing the upper Bollinger Band at 1.3645; a break higher would expose 1.3700, although elevated RSI and mixed UK inflation dynamics increase pullback risk.
USDCHF — USD/CHF rebounded after breaking below 0.8000, but the move appears corrective within a broader bearish dollar trend. The franc retains support from risk aversion and divergent monetary expectations; failure to reclaim 0.8100 would reinforce downside pressure and expose a deeper correction.
USDJPY — The yen remains under pressure from Japan’s widening trade deficit, weak Q2 GDP, fiscal concerns, and the absence of an immediate BoJ tightening catalyst. USD/JPY retains a bullish bias, with stronger Japanese CPI potentially delaying policy normalization further by worsening the growth-policy trade-off; the broader yen weakness is also evident in EUR/JPY near 185.20.
USDCNY — The PBoC set the central rate at 6.7808, modestly stronger than the prior fix but well above the Reuters consensus estimate of 6.7196. The gap indicates that authorities are allowing some market-driven yuan depreciation while anchoring expectations against disorderly weakness; a widening differential would increase upside risk in USD/CNY.
USDKRW — USD/KRW fell into the mid-1380s despite a 6% KOSPI decline, highlighting unusual won resilience during an equity selloff. The move may reflect export-related inflows or perceived intervention, but any confirmation of official support—or a reversal in capital flows—could produce sharp two-way volatility; near-term bias is modestly lower while the won holds firm.
USDSGD — USD/SGD extended its decline to 1.2708–1.2709 amid persistent dollar selling. UOB retains a bearish view toward 1.2695 and potentially 1.2670; resistance at 1.2740 and 1.2770 matters, while a break above 1.2770 would signal a reversal and a sustained move above 1.2810 would materially change the trend.
USDINR — The rupee remains vulnerable despite broad dollar weakness because high oil prices, the current-account burden, and a constrained FCNR(B) funding channel are dominating global USD effects. USD/INR retains an upward bias toward 96.00 as Middle East tensions keep energy costs elevated.
CENTRAL BANK WATCH
- Federal Reserve: Fed minutes kept 2026 rate hikes on the table if inflation remains persistent, but markets have sharply reduced the probability of a September hike to 32.7% following weaker labor and inflation signals. The near-term market interpretation remains dovish for the dollar.
- ECB: Markets assign a 90–94% probability to one final 25bp hike in September, sustaining the euro’s rate advantage over the US dollar.
- Bank of England: Markets price only one hike by year-end. Cooling wages and employment support a measured stance, but inflation at 2.9% after higher energy prices keeps the policy bias firmer than the Fed’s near-term repricing.
- SNB: Emerging dovish hints limit the franc’s rate advantage, but they have not offset the CHF’s safe-haven demand or the broader dollar decline.
- PBoC: The 6.7808 fix signals controlled yuan weakness rather than a full defense of the currency. Authorities are balancing export competitiveness against the risk of disorderly depreciation.
- BoJ: Markets see a possible hike as early as September 2026, but that expectation is too distant to support the yen today. The absence of an immediate policy shift leaves carry positions intact.
MACRO DRIVERS
- US fiscal credibility: The expanded Treasury buyback program has intensified concerns over fiscal overreach and dollar debasement, despite its limited direct market scale.
- Rate differentials: Lower US yields and reduced Fed-hike expectations contrast with continued ECB tightening expectations and a relatively firmer BoE stance.
- Geopolitical risk and oil: Trump’s “Economic D-Day” threat against Iran and restrictions around the Strait of Hormuz pushed Brent toward $94, raising inflation and growth risks while creating episodic safe-haven demand.
- Risk and capital flows: The won’s strength despite a sharp Korean equity selloff and the franc’s outperformance suggest that currency flows are not following a simple risk-on/risk-off pattern; perceived intervention, export inflows, and safe-haven demand are overriding equity signals.
POSITIONING IDEAS
Bullish
- Long EURUSD — The Treasury buyback expansion, falling US long-end yields, and strong September ECB hike pricing support sustained euro appreciation. Maintain a bullish bias while EUR/USD holds above 1.1600, targeting 1.1725–1.1800.
- Long GBPUSD — The collapse in September Fed-hike pricing to 32.7% is the clearest near-term catalyst, with sterling also supported by a relatively firmer BoE outlook. A break above 1.3645 would strengthen the case for 1.3700.
- Short USDCHF — The failure to reclaim 0.8100 would confirm that the rebound from below 0.8000 is corrective. CHF strength remains supported by risk aversion and persistent dollar selling.
- Short USDSGD — Momentum remains decisively lower, with UOB targeting 1.2695 and potentially 1.2670. The bearish setup is invalidated by a sustained break above 1.2770, with stronger reversal confirmation above 1.2810.
Bearish
- Long USDJPY — Japan’s weak growth, fiscal deterioration, trade deficit, and delayed BoJ normalization continue to undermine the yen. Strong CPI would likely reinforce yen weakness by increasing the risk that tighter policy damages already-soft growth.
- Long USDINR — Elevated oil prices and India’s external financing vulnerabilities are overpowering broad dollar softness, supporting a move toward 96.00.
- Long USDCNY — The PBoC’s fix remains materially above market consensus, signaling tolerance for gradual yuan depreciation. A widening fix-to-market gap would reinforce upside risk, though direct PBoC management remains the key constraint.