We believe a 'hawkish' address from Fed Chair Powell has the potential to generate a meaningful USD response, given the notable chart points in the BBDXY and recent positioning dynamics in both the FX (short USD) and U.S. FI (dovish) markets.
- The BBDXY has edged away from this week’s multi-month lows, but the recovery is far from convincing at this stage.
- Market pricing for an aggressive start to the Fed easing cycle has undermined the greenback in August, pressuring the BBDXY to the lowest level seen since March.
- Recessionary worry and dovish Fed pricing have eased from early August extremes, but questions surrounding the health of the U.S. consumer and the prospects for an economic soft landing have generated plenty of USD supply.
- 1-week, 1-month & 3-month BBDXY-weighted risk reversals continue to hover around multi-year lows, with the latter two in negative territory.
Fig. 1: Bloomberg USD Index (BBDXY)
Source: MNI - Market News/Bloomberg
Fig. 2: Bloomberg USD Index (BBDXY) 1-Week, 1-Month & 3-Month 25-Delta Risk Reversals
Source: MNI - Market News/Bloomberg
