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FX Update: USD a tough one to keep down.

Forex 5 minutes to read
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  The release yesterday of a negative first estimate for US Q2 GDP supported the kneejerk reaction to the FOMC meeting and sent the US dollar sharply back lower, especially versus the Japanese yen as the entire US yield curve dropped on the easing of Fed tightening expectations. But like the reaction to the Fed, the reaction to the GDP data is unwinding quickly, suggesting the risk of a rough ride over US data releases for the coming week.

FX Trading focus: USD a tough one to keep down

With Fed Chair Powell’s refusal at the FOMC meeting on Wednesday to provide forward guidance and indication that coming rate moves will depend on incoming data, the risk as we noted would be an increased sensitivity to data releases. And we saw that yesterday after the release of the weak first estimate of US Q2 GDP, which had annualized growth falling at -0.9% relative to the prior quarter (so an actual fall of less than 0.25%), led by shifts in inventories, weaker government spending and fixed investment, while personal consumption was +1.0%. Fair or not (and to be fair to observers like the Biden Administration, this does not look like a real recession at all yet) this drove the USD sharply lower, with the USD touching new local lows against the majority of G10 FX pairings and the JPY the highest beta currency to the situation on the sharp move lower in treasury yields. That reaction, rather like the kneejerk reaction to the FOMC meeting the day before, has in turn faded fairly quickly, if not fully, suggesting that the market realizes very well that the next data release could fail to support the trend toward lower and earlier peak Fed funds rates. Today we get the June PCE inflation data, but the busy data calendar through next Friday’s July US jobs report may offer a minefield for tactical USD traders, especially when the next CPI data points roll around on August 10 and September 13. Tactically, an important coincident indicator is the US 10-year Treasury yield benchmark, which finally punched below the 2.70% in the wake of the data release but has not followed through lower – if it reverses back sharply into the old range, that may be the end of this USD move lower for now – also in USDJPY terms (assuming no BoJ shift).

With the 10-year yield as one of the key indicators as noted above, the chief driver here is the direction in financial conditions, which, as I noted in this morning’s Saxo Market Call podcast, have continued easing here, whether in terms of market volatility risks like the VIX, corporate credit spreads or the Fed expectations themselves, which for next year are in steep reverse. But if we are headed for peak Fed and the beginning of a retreat next year, it is hard to believe that it will play anything like the late 2018/early 2019 style Fed shift. At that time, the Fed’s halt to QT and eventual move to cut rates and even resumption of QE was possible as there was no inflation to complicate the backdrop, and it while had softened a bit, there was no whiff of recession in the air. This time, the Fed is only likely to relent on further tightening and to begin ease because the labour market has come under severe pressure, which only happens in recessions. And recessions are historically where the Fed is busy chasing to get ahead of a worsening of financial conditions. And the latter only improve in a recession once the Fed has eased sufficiently to get ahead of the downturn. In short, the market is getting way ahead of itself here and we are likely well ahead of peak financial condition tightness – the point at which “something breaks” as we have phrased it before.

I still like USD longs – perhaps starting with GBPUSD and AUDUSD shorts if we close well south of 1.2200 and 0.7000, respectively, on the weekly close today. The risk, of course, is more choppiness next week on data releases.


This week has seen a tactical capitulation of the USDJPY bulls after the FOMC meeting and negative US Q2 GDP estimate. Overnight, the Tokyo CPI was a bit hotter than expected as well, although it is unlikely the BoJ will carry out a policy shift unless it is under duress at a time of weaker JPY and higher commodity prices. The Ichimoku level of note in coming days is the bottom of the cloud near 131.50, conveniently near the old cycle high that was retested back in June (likewise, perhaps not coincidentally, in the wake of the June FOMC meeting). As noted above the 2.70% area in the US 10-year Treasury benchmark is a critical coincident indicator, meaning that the top of the Ichimoku cloud could hold on today’s close if yield punch back higher post-PCE today.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Reserving judgment on the USD still as noted above, while the commodity currencies could be in for trouble if the greenback – which is a financial condition unto itself – rises again and risk sentiment rolls over. Sterling has been having a far too easy time of it lately.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
More JPY crosses trying to flip negative today (AUDJPY, GBPJPY, CADJPY, SEKJPY, even CHFJPY) – let’s see how this sticks – it is possible if longer yields can stick lower. EURSEK having a peek below the 200-day moving average today – as equities are ripping – as noted above, skeptical how much longer financial conditions can continue to support a development like that. Gold and silver are trying to flip positive, but bigger picture, gold needs a bigger pull higher above 1,780.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Jun. PCE Inflation
  • 1230 – Canada May GDP
  • 1345 – US Jul Chicago PMI
  • 1400 – US Jul. Final University of Michigan Sentiment


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