US Dollar: Policy uncertainty supports USD – BNY

BNY’s Geoff Yu says softer June Consumer Price Index (CPI) has reduced immediate inflation concerns, but limited Fed guidance continues to support policy uncertainty and US Dollar (USD). Wednesday’s Federal Open Market Committee (FOMC) decision and Thursday’s Personal Consumption Expenditures (PCE) Price Index release could produce significant moves in front-end rates, FX and risk assets.

FOMC uncertainty underpins Dollar outlook

"This week is dominated by Wednesday’s FOMC decision, which is notable precisely because the Warsh Fed has offered less forward guidance than markets are used to. That leaves the meeting unusually open to interpretation for this late stage in the cycle, with pricing still reflecting roughly a one-third chance of a hike and close to two hikes by year end. We think the below-expectation June CPI print will allow the Fed to remain on hold, but the resurgence of the conflict might push inflation higher later in the year."

"The FOMC is the central event for rates, FX, and risk assets. With limited communication from the new Fed leadership, we’ll watch the statement and press conference closely for any hint about the Committee’s thinking and whether market pricing for hikes later this year makes sense. Given the current setup, even small shifts in tone could move front-end rates materially."

"PCE on Thursday is the most important U.S. data point, but mostly as a second-stage catalyst after the Fed. A softer print would reinforce the disinflation impulse seen in CPI and further weaken the case for hikes, while an upside surprise would affirm the current more hawkish end-of-year pricing. Canadian GDP should matter primarily for the BoC path and CAD, though unless it meaningfully surprises, it will likely be secondary to the Fed/PCE combination."