The US dollar extended its slide, with DXY retreating from just under the 100.00 psychological level early in the month to test 98.50, hovering around four-month lows and marking a third straight monthly decline. There was little support from geopolitics or the US money market, while Fed officials were silent during the pre-meeting blackout and oil was the main asset reacting to the Middle East situation. US inflation data showed prices still running hot, keeping the focus on next week’s FOMC decision and the SEP; Retail Sales and housing releases also feature, while the BoJ rate decision remains in view.
Positioning data point to building bearish pressure. In the week to 1 September, CFTC figures showed non-commercial net longs slipping to just over 17K contracts and, with the four-week change at around -5.5K, the broader trend turned lower. Open interest rose to a bit more than 50K contracts, up roughly 4.3%, suggesting new shorts rather than a simple long unwind; speculative exposure fell to 34.04% from 38.96%, as its percentile eased to 50.9 and the net-position percentile to 63.9, alongside expectations for nearly 50 basis points of tightening by year-end and a 25-basis-point move seen as the base case for Wednesday.
Short-Term Volatility And Bearish Momentum
We expect heightened volatility for the US Dollar in the coming weeks as the index tests crucial support near the 98.50 level. With the Federal Reserve meeting next week, derivative traders should brace for sharp swings rather than a straight-line trend. We believe the immediate path of least resistance is lower, but the longer-term outlook remains supported by persistent inflation.
Our analysis of the latest CFTC data reveals that speculative net long positions have shrunk to just over 17,000 contracts. At the same time, open interest rose by over 4%, indicating that traders are actively establishing fresh short positions instead of just closing old longs. Historically, when speculative exposure drops to these levels, it often precedes a brief but intense dollar sell-off.
To position for next week’s Fed decision, we recommend using options to capture this short-term bearish momentum. Buying short-dated put options on the US Dollar against the Japanese Yen looks highly attractive, especially with the Bank of Japan also meeting next week. This double-header of central bank decisions is bound to push implied volatility up from its current quiet levels.
Inflation And The Longer-Term Dollar Outlook
However, we must not lose sight of the sticky inflation numbers, which remain well above the Fed’s 2% target. Because of this persistent price pressure, we expect the Fed to keep interest rates elevated for longer, preserving the dollar’s yield advantage over its peers. Once the initial post-meeting sell-off plays out, we should look to establish long-term dollar call options to capture an eventual recovery.
