The US Dollar (USD) is concluding the week with a mixed performance, showing slight firmness overall. However, the broader trend in the DXY continues to indicate softness, and the sentiment remains bearish.
With no US data reports today, attention is likely shifting to next week’s inflation reports, which may indicate an increase in year-on-year CPI. Typically, persistent inflation might reduce chances for an easier Federal Reserve policy and boost the USD, but this might not occur in the coming week.
Potential Fed Leadership Changes
Recent reports suggest that Governor Waller might be the preferred choice to replace Chair Powell. Furthermore, news that the White House is considering nominating CEA Chair Miran to the Fed board for Governor Kugler’s term was unexpected.
Miran’s potential nomination could strengthen support for lower rates, influencing market expectations for a September rate ease. A potential outcome of this scenario is creating USD headwinds due to lower short-term rates and a steeper yield curve.
Currently, there are no US data reports, but St Louis Fed President Musalem will speak at 10.20ET. As a relatively hawkish member of the FOMC this year, his remarks will be closely monitored for insights regarding the policy outlook.
We are seeing the US Dollar struggle, even with some minor daily gains. The broader DXY trend remains soft, as it has for much of this year, recently testing support near the 102 level after falling from earlier highs. This reinforces our bearish outlook on the dollar for the coming weeks.
Market Focus and Strategy
All eyes are on next week’s inflation data, which is expected to show a slight year-on-year increase. Unlike in the past, a hot CPI print might not strengthen the dollar because the market is more focused on potential shifts in Fed leadership. After seeing core inflation prove sticky around 3.2% in the second quarter of 2025, the market’s focus has shifted away from the data and onto the Fed’s reaction.
The real story driving sentiment is the potential for a more dovish Federal Reserve board. Talk of Governor Waller potentially replacing Chair Powell, and especially the nomination of CEA Chair Miran, suggests a strong tilt towards easing monetary policy. Miran’s presence would significantly increase the odds of a rate cut as soon as September, a move the market is now pricing with over a 60% probability.
Given this outlook, we should consider strategies that profit from a weaker dollar and lower short-term interest rates. This could involve buying put options on the USD through ETFs like UUP or purchasing call options on currencies like the Euro. Traders might also look at interest rate derivatives that benefit from a steeper yield curve, anticipating the Fed will cut short-term rates.
In the short term, we will listen closely to St. Louis Fed President Musalem’s speech for any counter-narrative, as he is known to be hawkish. Looking back to the 2023-2024 period, we saw how the market often priced in policy shifts based on personnel changes well before the official announcements were made. Any dollar strength following his comments could present a better opportunity to position for the expected downward trend.
