Dollar positioning follows winding road of Fed expectations
In the recently closed May 15-21 CFTC reporting period, the dollar index fell a further 0.42%, hinting that the net spec long USD position likely slipped further amid growing dovish, or less-hawkish, Fed rate expectations for the balance of 2024.
Fed Chair Powell sparked the recent trend of lower USD positioning when he said after the latest FOMC meeting that the next move by the U.S. central bank would probably not be a hike.
However, Fed rate expectations have remained relatively consistent with the first cut priced on LSEG's IRPR page, at near 80% for September, leaving the USD index only slightly off the 2024 high above 106 that it struck in April, as policymakers have consistently expressed concern about elevated inflation.
EUR/USD rose 0.34% in the recently closed IMM period, though the EUR remained relatively weak, ex-JPY, when compared with other major currencies versus the USD as the ECB is expected to begin cutting rates in June and deliver a total of 64bp of easing by year-end.
EUR positioning has flipped back to long recently on the less-hawkish Fed narrative, though the ECB's apparent willingness to cut in June while the Fed stands pat could keep EUR/USD's 2024 highs just below 1.10 safe.
USD/JPY fell 0.15% in the May 15-21 reporting period, a move that was merely noise as traders respected the wide U.S.-Japan rate spread differential.
Barring a BoJ rate hike or MoF intervention, rate spreads are likely to keep the USD bid versus the yen. Yen short positioning has greatly reduced over the last three reporting periods -- from -180k contracts to -126k contracts -- as the move from 160 to 152 stirred short-covering in the Japanese currency.
GBP/USD rose 0.95% in the recent IMM period, a somewhat confounding move given more dovish BoE tones at the last meeting's rate hold.
Though not to be reflected in this Friday's data, traders appear to have guessed right on UK inflation, which came in lower but still hotter than forecast, and pushed GBP/USD to a 2-month high at 1.2761.
With June and August BoE cut expectations declining, the pound may test 2024 highs above 1.28, and GBP IMM position may flip to positive over the next few periods as UK and U.S. rate expectations remain steady near current highs.
AUD/USD rose 0.62% in the May 15-21 CFTC reporting period. Though the recent RBA meeting was interpreted as dovish, with a cap in for U.S. rates and the RBA not expected to cut rates, as per IRPR, until April-May 2025, AUD/USD is likely to remain bid as shorts cover positions.
As for my IMM positioning metric -- which is based on futures contracts as a percentage of total positioning to help inform and interpret other market indicators -- shows no directional signal for EUR. But with long and short positioning being large, any break to new trend high or low may stir volatility.
Like last week, yen and long CAD would be indicated as potential buys by the metric. However, stark Japan fundamentals make yen long positions tricky. AUD positioning suggests long aussie could be on the cusp of flashing potential buy signals.
In the graphic below, a position of +/-40% is generally a signal to sell or buy. Also, the metric is negatively correlated, so the yen at -64% would signal a buy.
IMM position table: https://tmsnrt.rs/3yvIOfI
IMM Positioning Chart: https://tmsnrt.rs/3QUWJlU
(Paul Spirgel is a Reuters market analyst. The views expressed are his own)
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