The US Dollar Can’t Catch a Bid, Trading at 3-Year Lows as Inflation Cools

US inflation continues to normalize

US core producer price inflation came in at 0.1% m/m, which accounting for the components from the CPI release, suggests US core PCE Inflation (released on 27 June) is likely to come in around 0.15% m/m, putting the annualised core PCE inflation rate at 2.6%.

Clearly, we’re not seeing any noticeable effects of tariff pass-through in the inflation data at this stage, and we can see that the tradeable inflation markets have taken notice. US 1-yr inflation swaps have pulled below 3%, falling a healthy 9bp on the day.

Jobless claims and payrolls - the trigger for a higher volatility regime

US weekly jobless claims also receive ever-increasing attention, with US jobless claims coming in unchanged at 248k, while continuing claims increased to 1.956m. These metrics do warrant close attention, as there is a growing view that should jobless claims push above 280k, and then backed by a below 100k read in the nonfarm payrolls report, this dynamic could prove to be the trigger for a repricing of Fed cut expectations - and it’s here that presumably we see Treasury curve steepeners added liberally, volatility pushed higher with the S&P500 losing the ‘buy the dip’ mantra and the USD set to take a leg lower.

For now, the tariff news flow continues to be modestly supportive of risk and is a USD negative, even if there are still many questions from various market players on the calculations behind the tariff rates.

On the day, the buying in US Treasuries was at the heart of the cross-asset moves, with the UST 10-year finding a bid through early EU trade, with yields falling from 4.41% into the data deluge before troughing at 4.33% shortly after. The broad USD traded lower in response to the rally in USTs, with S&P500 futures subsequently lifting from a low of 5990 to a session high of 6051, where we saw increased supply on the day kicking up above 6040.

A solid $22b US 30-year Treasury auction was also helpful in keeping long-end Treasury yields suppressed going into the close, and the USD bears will now want to see 10s pulled lower towards 4.20% to get further juice out of their short USD exposures. We’ll see how the news on tariffs plays out early next week, as we will around the debate in the Senate on the ‘One Big, Beautiful Bill”, while on the scheduled event risks, US retail sales, import prices, and the FOMC meeting will be risk events for traders to navigate. Client activity focused on the USD pairs and gold Our flows on the day have been skewed towards directional trades on the USD pairs and gold, with the yellow metal rallying just shy of $3400 and the recent range highs – China steps up and we look to see if Chinese buyers can push Shanghai gold futures higher, with Comex futures set to follow and needing a break of $3427 for a possible run at the former ATHs of $3539.

There has been some increased interest to trade platinum, which won’t surprise given its now 9-day explosive move higher.

USDNOK and USDSEK shorts have been the play on the day, with USDSEK breaking through the 9.4649 floor and USDNOK smacked to new cycle lows and keeping the defined bear trend seen since 13 Jan firmly in place. Naturally, EURUSD gets the central focus from traders, with the spot rate closing at 1.1584 and above the former 21 April highs of 1.1573 - while some try to stand in the way of the USD flows, this is a blanket USD move, and these shifts can be powerful and lasting in duration. The hedge funds are typically first on the crime scene but when real money accounts start to shift portfolio holdings (in this case USD exposures) it can lead to incredible trends in price.

Many will point to the idea that the USD has already come off around 7% (on a real effective exchange rate basis) - but if we are really looking at a major portfolio shift and a reweighting of USD exposures, and if the USD is to fully revert to the long-term mean, then we’re looking at a potential further 10% over time.

USDCHF has also seen good interest to add to shorts from momentum accounts, with some tactically look at longs feeling the move may have been overdone. The CHF does interest as both a momentum play, but also tactically with the Swiss National Bank meeting next week and CHF swaps implying a 31% chance of a 50bp cut – an action which would take the policy rate into negative territory. While traders navigate the Fed meeting, if the SNB decides to ease by ‘just’ 25bp and the Fed does indeed lean on the dovish side of the ledger then USDCHF could be at new cycle lows.

Good luck to all.