US Treasury market developments and the inflation outlook are affecting the foreign exchange market, with the US dollar generally weakening and non-US currencies on an upward trend. The euro is gaining strength, while the yen is expected to remain range-bound around ¥159.
The foreign exchange market has recently been characterized by broad-based US dollar weakness and relative strength in non-US currencies. The dollar index has come under downward pressure as the US Treasury expands its buybacks of long-term US Treasuries, while support from safe-haven demand arising from geopolitical risk aversion has been limited. Meanwhile, the euro has maintained its upward trend on improving manufacturing indicators and the outlook for monetary policy, while the yen is expected to remain range-bound around ¥159, influenced by the US-Japan interest-rate differential and domestic inflation trends.
This week brings a concentration of important US indicators and events, including PCE inflation, employment data and remarks by officials at Jackson Hole. These are expected to provide clues about the Federal Reserve's policy path and influence the US dollar's short- to medium-term direction. Non-US currencies are expected to remain at elevated levels, while regional inflation data and changes in geopolitical conditions will be watched as factors that could shift sentiment toward risk assets.
Major currency pairs and market positioning
According to futures positioning data released by the US CFTC, net short positions in the euro increased, while net long positions in the yen expanded. The British pound saw an overall shift in positioning, and the yen reportedly experienced significant one-way positioning changes. These developments suggest changes in market participants' risk appetite and adjustments to short and long foreign exchange positions.
Points to watch going forward include how the Bank of Japan's policy stance, US PCE data and remarks at Jackson Hole affect the yen and US Treasury yields. Changes in geopolitical risks and oil prices could also increase short-term volatility, and market participants are expected to assess the market's response with a focus on events including the September policy meetings.