DBS Bank’s Philip Wee notes that Dollar bulls have built substantial long USD positions ahead of the FOMC, encouraged by Brent’s sharp rebound and expectations of a surprise rate hike by Chairman Kevin Warsh. However, he highlights growing scepticism that markets have overpriced hawkishness, with softer US data and recent pullbacks in Brent and US Treasury yields tempering the outlook for further tightening.

USD longs vulnerable to quiet Fed

"Driven by the rebound in Brent crude from $70 to $100 in the first three weeks of July, dollar bulls accumulated long USD positions, betting that Fed Chairman Kevin Warsh would deliver a surprise rate hike at his second meeting."

"The sceptics believe that these USD bulls have overpriced such hawkishness, banking too much on volatile energy prices rather than data."

"The US Treasury 10-year yield eased, but hawks limited the decline to 4.60%, brushing aside the weakening US economic outlook."

"What markets are assured of is Warsh’s promise of “honest discussion” with his Fed colleagues and his commitment to end forward guidance."

"Hence, there is a risk that speculators may have to lighten their long USD positions if today’s FOMC meeting does not turn out hawkish enough to prompt a surprise hike today or to support a tightening in September."

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