FX Daily: Fed pricing and tech indigestion bolster dollar | articles

Friday saw one of the cleanest and broadest dollar advances in quite a while. The core driver of the move was the strong US jobs report, which has raised expectations that this year’s energy inflation shock is landing on fertile ground for second-round effects. The market is pricing close to 30bp of Federal Reserve tightening this year and 50bp of tightening by the second quarter of 2027.

At some point, that expected tightening will be too aggressive, but we cannot see that story being unwound this week. This is because it is another week for US price data, where the May headline CPI reading is expected to push through 4% year-on-year, and PPI final demand should remain near 6% YoY. We are now also in a Fed communication blackout period ahead of the 17 June FOMC meeting, meaning there is little to no scope for the Fed doves to push back against this pricing. In fact, we see the dollar staying bid into that FOMC meeting, given the market expects the central bank to remove its implicit easing bias.

At the same time, growing expectations of Fed tightening have caught an investor base overweight equities and overweight emerging markets. As we discussed in an article on Friday, it looks like investors might be selling off benchmark tech names to clear room in portfolios for Friday’s $75-85bn SpaceX IPO. There could also be an issue of indigestion here as well, given that Alphabet recently tapped the equity market for $85bn, and OpenAI and Anthropic also plan to IPO in the coming months. We see the Swedish krona and the Israeli shekel as the most tech-sensitive currencies in the G10 and EM spaces, respectively.

An unwind of risk assets and especially an unwind of emerging market positions is normally dollar-positive. This probably adds weight to US Treasuries as well, given that emerging market nations (and presumably Japan again sometime) will be liquidating Treasuries for FX intervention operations. One further source of dollar selling this week could come from Korea’s National Pension Service. In exceptional times, it can increase its benchmark 15% hedge ratio on foreign assets and has said that it is doing so today. As of April, it held over $400bn of foreign equities and bonds – a big chunk of which is presumably in the US.

The geopolitical backdrop is also shifting dollar-positive, with most surprised that Brent is not trading even higher now that Iran and Israel are directly exchanging fire.

DXY should stay bid and looks biased to test resistance in the 100.25/65 area. The dollar’s recent strength is a reminder that cyclical rather than structural factors continue to dominate.

Chris Turner