Insights 
VT 
Nomura anticipates further weakness in the USD if Powell indicates a softer labour market during the Jackson Hole event. Recent softer NFP and CPI data suggest the Fed may cut rates, with a 25bp reduction in September as their base case. The stronger July PPI is viewed as a temporary issue.
Market Positioning
Market positioning appears not overly crowded, suggesting potential for the dollar to decline if Powell hints at dovish policy or if upcoming data remain weak. Potential risks include stronger-than-expected August data, increased foreign inflows into US assets, or a resurgence in China-related USD demand.
At Jackson Hole, a nod to a softer labour market by Powell could lead to further dollar weakness. If there is no such indication, markets might hold off until the September NFP and CPI data for guidance on future movements.
The current stance maintains a short USD position, acknowledging potential event and data risks that could affect sentiment in the near term.
Our conviction is that the dollar will weaken further, with the Federal Reserve on track to cut rates. The recent July jobs report, which showed a slowdown with only 155,000 jobs added, supports the view that the labor market is softening. With core inflation now down to a two-year low of 2.8%, a September rate cut is our base case scenario.
For the coming weeks, buying put options on the US dollar index (DXY) with a September expiry offers a defined-risk way to position for this. This strategy allows us to capitalize on a potential sharp decline following the Jackson Hole symposium while capping our potential loss at the premium paid. It is a more cautious approach than shorting futures directly, given the short-term event risk.
Speculative Positioning
We see room for this move, as Commitment of Traders reports show that speculative positioning is far from the crowded short-dollar trade we saw in late 2023. That period provides a useful historical parallel for how quickly the currency can fall once the market senses a true Fed pivot to easing. This suggests the current trend has space to run if the data continues to cooperate.
However, we must remain vigilant about risks that could strengthen the dollar. A surprisingly strong August manufacturing or services PMI report, or renewed worries over China’s economic stability, could trigger a flight to safety. Such an event would invalidate bearish dollar positions very quickly, making stop-losses on any futures positions essential.
The key catalyst will be Fed Chair Powell’s speech at Jackson Hole. If he explicitly acknowledges the softening labor market, we expect the dollar to weaken immediately. If he remains non-committal, derivative traders should expect range-bound trading until we see the next inflation and employment reports in early September.
