OCBC said the US dollar faces modest upside risk, with attention on Kevin Warsh’s appearance at Sintra and upcoming US payrolls. The bank assessed the chance of new policy guidance as low after June’s FOMC press conference, but framed Warsh’s stance on Middle East developments, the fall in crude oil prices and labour-market conditions as the main drivers of near-term USD direction. It pointed to the May JOLTS report as evidence that US labour conditions have stabilised after earlier softening, keeping hawkish Fed risks in focus.
On Europe, OCBC tied the outlook to softer eurozone inflation, which it said reduces pressure on the ECB to tighten further in the near term after June’s hike. It also reported that an overtly dovish shift from Christine Lagarde at Sintra appears unlikely, while ECB officials continue to cite uncertainty around second-round effects. Several policymakers, it added, have indicated there is no pressing need to hike in July if energy markets remain stable.
Central Bank Policy Divergence and Dollar Outlook
We see a modest upside risk for the US dollar in the coming weeks, with all eyes on Fed Chair Warsh at the Sintra conference and the upcoming payrolls report. The key theme is a strengthening dollar supported by a hawkish Federal Reserve, while the European Central Bank has less pressure to act. This divergence in central bank policy creates a clear opportunity for traders.
The latest JOLTS report from May showed 8.1 million job openings, and the most recent payrolls added a solid 270,000 jobs, supporting our view that labor conditions have stabilized. This solid data gives the Fed room to maintain its hawkish stance, as reflected in the June dot plot which still signals the possibility of one more hike this year. We anticipate Fed Chair Warsh will emphasize this strength in his remarks.
On the other side of the Atlantic, the latest flash estimate for eurozone inflation came in at 2.4% for June, continuing its gentle cooling trend. This reduces any urgency for the ECB to consider another rate hike soon, especially after their move last month. ECB officials seem content to wait and see, particularly as WTI crude oil prices have fallen back towards $80 a barrel.
Positioning for Dollar Strength and Volatility Management
Given this outlook, we believe positioning for modest dollar strength is the prudent move. This could involve buying USD call options against the euro (EUR/USD put options) to capitalize on the expected policy divergence. These positions offer defined risk while capturing potential upside if Warsh reinforces a hawkish message and US data remains firm.
This setup is reminiscent of the 2014-2015 period, where clear Fed and ECB policy divergence led to a sustained rally in the dollar index of over 20%. Using options can help manage the volatility we expect around the Sintra speeches and the release of the non-farm payrolls data. We are looking for confirmation of this trend, not a major policy surprise.
