Will Extreme Noise and Volatility Limit US Dollar Gains This Week?

US dollar declined last week

The US Dollar Index (UUP) gave up some of its gains as short covering in the FX (foreign exchange) markets and a decline in US bond (BND) yields took their toll. Economic data from the US was limited, but traders’ anxiety about the G7 summit, the US-North Korea summit, and a series of central bank meetings limited any gains in the US dollar. The US dollar index closed for the week ending June 8 at 93.5, depreciating 0.67%.

Will Extreme Noise and Volatility Limit US Dollar Gains This Week?

Speculators turned bearish on US dollar

As per the latest commitment of traders (or COT) report, released on June 8 by the Chicago Futures Trading Commission, large speculators and traders have increased their bearish positions on the US Dollar Index. As per Reuters calculations, the US dollar’s (USDU) net short positions increased from $4.9 billion to $5.5 billion. This amount is a combination of the US dollar’s contracts against the combined contracts of the euro (FXE), the British pound (FXB), the Japanese yen (FXY), the Australian dollar (FXA), the Canadian dollar (FXC), and the Swiss franc.

FOMC and ECB could drive dollar demand

There are many important geopolitical and macroeconomic events lined up this week. The divergence in monetary policy among developed nations is likely to come back in focus as the US Fed and the European Central Bank announce monetary policy actions. The US Fed is widely expected to increase interest rates by 0.25%, while the ECB is expected to make no changes to its policy.

Though the outcomes from both the meetings are already priced in, the tone of the post-meeting statement and the press conference could determine the direction for FX markets. Whoever comes out with a hawkish statement could see their currencies rally by the end of this week.