Why have higher energy prices failed to trigger a stronger USD?

So the dollar has continued to correct lower over the past week.

What has been the main drivers?

Yeah, like you said, over the last couple of weeks, the dollar has definitely lost some upward momentum.

And like you say, we've seen the dollar index kind of moving back towards support closer to the one hundred level, um, over the past week.

Uh, to us, the kind of main driver really has been the disappointing kind of US data where we saw, uh, clear evidence of, uh, much softer US inflation in the month of June.

It was obviously widely expected that headline inflation would slow because gasoline prices had fallen on average by about ten percent in the month of June, which obviously helped bring down headline inflation.

But I think the biggest surprise really was the, um, I guess the broader evidence of disinflation pressure.

So if we look at core inflation, for example, that was flat month on month.

Uh, I think that was the biggest downside surprise since May of, of last year.

So that definitely is good news for the Fed and for financial markets.

It should give them a more leeway to leave rates on hold, uh, this month and then give them time over the summer to see how inflation risks develop, uh, before we get to the kind of next FOMC meetings in September and, and October, closer to the, um, the midterm elections in, in November.

Um, it's our view still that we think that the Fed can look through this period of higher inflation.

Yes, at the moment they're, they're clearly kind of talking tough on inflation.

We've seen three, uh, Fed governors over the past week, um, Christopher Waller, Lisa Cook, and also, uh, Jefferson as well, have all indicated that they are uncomfortable about the current level of inflation and are prepared to hike rates if inflation doesn't slow.

But we still think that over the summer period, we should see more evidence emerging that inflation is slowing down, which then would give them the justification to, to leave rates on hold.

So that's still kind of a key assumption behind our forecast for the dollar to, um, to weaken further as we head into, into year-end.

There are obviously risks to those forecasts, the most obvious being the renewed military, uh, strikes in the Middle East, which have lifted the price of oil back above eighty-five dollars per barrel.

Obviously, the longer that conflict goes on, um, the greater the risk that that could prove more inflationary and, and put, put Fed rate hikes onto the table, which would, would clearly be, uh, an upside risk to our, our forecast for, uh, a weaker dollar.

Uh, we're also monitoring closely as well recent developments in the equity market where we've seen some, uh, weakness in AI-related equities.

Obviously after a strong run higher for AI-related equity performance in the months of kind of April and May.

Um, over the past month or so, we have seen AI-related equity indices coming under some selling pressure.

Uh, obviously if that correction lower was to deepen, uh, more significantly, uh, that as well could, could pose some risks for carry trades in the FX market.

If we were to see financial market stability being threatened, that would make conditions for carry trades much less attractive.

And additionally, in terms of dollar positioning, that also could be a negative factor for the dollar.

Um, if we look at the recent, uh, tick data from the US Treasury, we can see there that there was significant, uh, buying of US equities by foreign investors, um, up to the month of, of May, um, which kind of highlights there that the end market is more heavily positioned long US equities.