Dollar Bulls Let Down By Data and Fed

It was a disaster for (US) dollar bulls last week. First off, the Fed meeting earlier in the week, struck a dovish tone despite the Fed's attempt to soften rhetoric regarding near-term risks to the (US) economy. The treasury complex, including fed fund futures, sold off immediately after the statement was released, but made a dramatic u-turn after liquidity dried up soon after. This caused the dollar to reverse all of its previous gains and then some, demonstrating once again that market participants do not believe that a hike is imminent.

Expectations for a September move (by the fed) and for a potential (single) hike by year-end have receded once again, enabling the euro (EUR/USD) to cement a well-needed near-term base since consolidating post-Brexit weakness. This shifted momentum on most technical readings for the EUR/USD, paving the way for further dollar weakness.

Large speculators, according to the most recent CFTC report, were also caught wrong-footed going into the Fed decision, as the latest data showed another weekly increase in the net short position. Despite being far from an extreme (from a net short positioning standpoint), bearish sentiment had risen quite substantially since May. In retrospect, it (EUR/USD short positioning) was due for a pause, as it closely resembled the last winter's one-sided move (in terms of length of time and amount of contracts from peak-to-trough) when the euro reached its largest net short position in history.

Later in the week, after the BOJ disappointed market expectations for a increase in additional bond-buying stimulus,  (US) yield differentials tumbled, adding further (downside) pressure for the DXY (Dollar  Index). Then to add insult to injury, Friday's (US) 2nd quarter GDP greatly disappointed investors, causing the dreaded R-word to be mentioned once again.

The end result was a dark cloud-like, outside (down) week for the dollar vs a basket of major currencies, which portends further (dollar) weakness given the size and scope of last week's move. The silver lining, however, is that central banks (including the ECB & BOJ) sound less sanguine, which could limit yields across the globe to further downside. This could enable US treasury yields to form material basing patterns across the curve, which could lend support down-the-road for the greenback. That said, momentum is clearly against the USD and look for the reported near-$15 billion long aggregate position that has been built up by large speculators over the past few months to continue to be trimmed.