Nomura expects the USD to weaken further if Powell hints at a sluggish labor market during the Jackson Hole event. Recent weaker data on NFP and CPI suggests that the Fed may reduce rates, with a 25 basis point cut in September as a likely scenario. The stronger July PPI is considered a temporary issue.

Market Positioning

Market positioning looks manageable, indicating the dollar could drop if Powell indicates a softer policy or if new data remains weak. Risks include stronger-than-expected August data, more foreign investments in US assets, or an increase in USD demand related to China. At Jackson Hole, if Powell mentions a weaker labor market, we could see further dollar decline. If not, markets may wait for September NFP and CPI data for direction. Right now, our position is short on the USD, while staying aware of potential risks from upcoming events and data that could change market sentiment soon. We firmly believe the dollar will weaken more as the Federal Reserve plans to cut rates. July’s jobs report, which showed only 155,000 new jobs, backs our view that the labor market is slowing. Core inflation has also dropped to a two-year low of 2.8%, making a September rate cut likely. In the coming weeks, purchasing put options on the US dollar index (DXY) with a September expiration provides a way to limit risk while positioning for a possible sharp drop after the Jackson Hole symposium. This method helps us profit from a potential decline while keeping our losses limited to the option premium, making it a safer choice than directly shorting futures given the short-term risks.

Speculative Positioning

We see potential for this shift, as the Commitment of Traders reports indicate speculative positioning is not as crowded as it was for shorting the dollar in late 2023. That time offers a useful comparison for how quickly the currency can decline once the market senses a genuine Fed shift towards easing, suggesting that the current trend can extend if data continues to align. However, we must stay alert for risks that might boost the dollar. Strong manufacturing or services PMI reports in August or renewed concerns about China’s economy could prompt a flight to safety. Such scenarios would quickly invalidate bearish positions on the dollar, making stop-losses on futures positions vital. The key moment will be Fed Chair Powell’s speech at Jackson Hole. If he openly acknowledges the softening labor market, we expect the dollar to drop immediately. If he is non-committal, traders in derivatives should prepare for range-bound trading until we receive the next inflation and employment updates in early September. Create your live VT Markets account and start trading now.

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