US Dollar: Volatility sinks as carry trades hold – ING
ING’s Chris Turner notes that FX volatility is falling as investors appear comfortable with the Federal Reserve holding or potentially tightening rates in September.
US dollar volatility has decreased as investors feel comfortable with the Federal Reserve potentially holding or tightening rates in September, according to ING's Chris Turner. Limited impact from upcoming US CPI on carry trades is noted, but higher US Treasury yields and tech-sector issuance could pose risks. The DXY is expected to stay in a tight 99.50-100.00 range.
The main risk event is the Fed's policy meeting on September 16, where a 50% chance of a 25bp hike is priced in. Should market pricing shift due to the July CPI release, it should not significantly impact the carry trade. A looming threat is the bond market, with longer-dated US Treasury yields at recent highs and tech industry planning more debt issuance.
A bond market sell-off is a key potential threat. DXY is projected to continue trading within the 99.50-100.00 range before the CPI release. GBP/USD has recovered from a three-day retracement, hovering around the 1.3550 region. EUR/USD has gained momentum, surpassing the 1.1600 level. Gold struggles to capitalize on a bounce from sub-$4,400 levels as the US Dollar strengthens.
Fed Chair Kevin Warsh's hawkish remarks and inflation risks from higher oil prices boost September rate-hike expectations, while US-Iran tensions may support the USD as a safe-haven, warranting caution for gold investors. The US diesel crack spread has surged above $100 per barrel for the first time.
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