Commerzbank’s Michael Pfister argues recent US Dollar strength rests on increasingly hawkish Federal Reserve expectations that may be overdone. With June US inflation seen slightly weaker than consensus and Oil prices lower, he highlights that US Dollar performance has historically been negative on CPI days. Pfister sees asymmetric risks for the Dollar today, with limited upside and greater vulnerability to dovish signals from Chair Warsh.

Dollar rally vulnerable to CPI risk

"In light of the increasingly hawkish comments from the Fed, we have discussed at length the reasons behind the massive USD rally in recent weeks, while also making no secret of our scepticism regarding the two interest rate hikes that have already been priced in. The only missing piece of the puzzle was a point at which expectations might shift again. Two events today offer an opportunity to cast doubt on these ambitious expectations:"

"In order to strengthen the US dollar further, or at least keep it stable, the inflation figures would need to justify interest rate hikes. However, our economists expect price pressures to be slightly weaker today than the consensus forecast. This is unlikely to be enough."

"If this proves to be the case, today's figures are likely to follow the pattern of recent years, during which the US dollar has tended to lose ground on the days these figures are released."

"During his hearings before the congressional committees today and tomorrow (the House today and the Senate tomorrow), he will have ample opportunity to outline his views on future monetary policy. Although he generally favours a more reserved approach to communication, there are likely to be some clues. It is rather unlikely that these will be more hawkish than the market is currently anticipating."

"The risks for the US dollar during today's trading session are thus likely to be distributed asymmetrically: if dovish signals emerge, the USD is likely to take a significant hit. Given the already quite ambitious Fed expectations, however, the potential for appreciation is likely to be more limited."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)