The US Dollar Index (DXY) hovered near 101.20 on Tuesday as markets weighed mixed US releases alongside hawkish Federal Reserve communication. EUR/USD slipped to about 1.1420 after Germany’s preliminary headline inflation cooled to 2.4% in June from 2.7% in May, while retail sales surprised on the upside with a 1.1% MoM rise in May following a -0.4% fall previously. Sterling was steady around 1.3255, with Bank of England guidance pointing to patience even as UK inflation was seen potentially moving towards 3.2% later this year. Elsewhere, USD/JPY reached a four-decade peak near 162.60, keeping the yen under pressure despite ongoing talk of official intervention.
AUD/USD firmed around 0.6920 after Reserve Bank of Australia minutes and stronger Chinese data supported the currency, with China’s NBS Manufacturing PMI at 50.3 in June and the Non-Manufacturing PMI at 50.2. In commodities, WTI traded near $70.10 per barrel as easing supply concerns and reports of possible US-Iran talks steadied expectations; Reuters said Brent and WTI were tracking their steepest monthly and quarterly declines since 2020. Gold was subdued near $4,020 as a firmer dollar and revived prospects of Fed rate rises constrained demand.
US Dollar Strategies Amid Global Central Bank Divergence
Given the Federal Reserve’s hawkish commentary, we believe the US Dollar will continue to show underlying strength in the coming weeks. With the latest US Core PCE data showing inflation still persistent at 2.8%, the Fed has little reason to pivot from its firm stance. We will be looking to build long positions in the US Dollar Index (DXY) through futures contracts.
The divergence between the Fed and other central banks presents a clear opportunity, particularly against the Euro and the British Pound. Easing German inflation at 2.4% gives the European Central Bank room to pause, while the Bank of England’s “no rush” approach signals weakness. We will be using put options on EUR/USD and GBP/USD to capitalize on this widening policy gap.
While the USD/JPY trend is strong, the pair’s position at a four-decade high near 162.60 makes us extremely cautious of intervention from Japanese authorities. We saw how Japan’s intervention in late 2022 caused a sharp reversal of over 5 yen in a single day. Rather than taking on direct long positions, we will use option strategies like call spreads to limit our risk.
The Australian Dollar is finding support from positive Chinese economic data, with the recent Caixin Services PMI confirming expansion at 54. A stronger China is good for Australia, but the dominant force remains the US Dollar. This makes us neutral on AUD/USD and we will instead look for relative strength in pairs like long AUD/JPY.
Commodities Approaches: Crude Oil and Gold
We anticipate further weakness in WTI crude oil, which is struggling to hold the $70 per barrel level. Recent data from the EIA showed a surprising build in US crude inventories, signaling that supply is currently outpacing demand. We will look to sell futures on any short-term rallies, targeting a move down toward the mid-$60s.
Gold’s inability to rally despite its high price of $4,020 is a bearish signal, as it remains vulnerable to a strong dollar and high interest rates. With the US 10-year Treasury yield holding firm above 4.3%, the appeal of non-yielding gold diminishes significantly. We see this as an opportunity to sell out-of-the-money call options to collect premium as prices likely stagnate or fall.
