The US Dollar Index sat near 101.60 on Wednesday, a one-year high, with markets focused on Thursday’s US Personal Consumption Expenditures Price Index release at 8:30am EST. The May PCE print is being watched for evidence that higher oil prices linked to the US and Israel’s war with Iran have fed into core inflation, a backdrop that could leave US Treasury yields prone to sharp moves after the data. Next on the US calendar are GDP and initial jobless claims.
In G10 FX, EUR/USD drifted towards 1.1360, close to a one-year low, before rebounding from 1.1325, while GBP/USD hovered near a one-year low of 1.3160 after S&P Global flash UK composite PMI eased to 49.4 in June from 49.7 and services PMI fell to 48.7, a 41-month low. USD/JPY pushed up to 161.80; AUD/USD slipped below 0.6890 after Australia CPI cooled to 4.0% in May from 4.2% in April versus 4.4% expected, even as trimmed mean inflation rose to 3.6% from 3.4%. In commodities, WTI weakened towards 70.00, a three-month low, and gold fell under $4,000 to $3,980. Tokyo CPI and final University of Michigan consumer sentiment follow on Friday.
US Dollar Outlook and G10 Strategies
Given the US Dollar’s strength ahead of today’s key inflation data, we expect significant volatility in the coming weeks. A hot Personal Consumption Expenditures (PCE) number will likely send the Dollar Index higher, reinforcing the Federal Reserve’s “higher-for-longer” stance. We are positioning for this by considering options strategies that benefit from a large price swing, as a surprise in PCE data historically moves 2-year Treasury yields by 5-10 basis points almost instantly.
The Euro is struggling to gain ground despite hawkish talk from the European Central Bank, telling us the market is focused solely on the Fed. We believe selling EUR/USD call options is a prudent strategy, as the powerful US dollar trend should cap any potential rallies. This divergence, where one central bank’s hawkishness is ignored, suggests deep-seated bearish sentiment for the pair.
For the British Pound, we see continued weakness due to both political uncertainty and soft economic data. The recent flash services PMI dropping to 48.7, a 41-month low, points towards a potential economic contraction that could drag GBP/USD lower. We are looking to buy put options to protect against a further slide below the 1.3160 level.
The Japanese Yen remains under severe pressure, with USD/JPY testing intervention levels around 161.80. While the trend is clearly upward, the risk of sudden intervention by Japanese authorities is extremely high. We prefer using call options to participate in any further upside, as this limits our potential losses from a sharp, multi-yen reversal, which has been common during past interventions.
Australia’s mixed inflation signals, with headline figures easing but core inflation remaining sticky, create uncertainty for the AUD/USD. The upcoming employment data will be the tie-breaker for the Reserve Bank of Australia’s next move. We are looking at strangles on the pair to profit from a breakout in either direction following that news.
Commodity Markets and Safe Haven Assets
In commodities, both oil and gold are facing headwinds from the strong dollar. With Middle East tensions easing, we see the risk premium in WTI crude oil continuing to unwind, even as recent EIA data showed a 2.5 million barrel inventory draw. We are considering put spreads on gold as it struggles below the $4,000 level, pressured by the prospect of sustained high interest rates.
