Barclays suggests that at the end of the month, there won’t be much selling of the dollar against most major currencies. The model remains neutral regarding the euro and yen. US bonds and stocks are having a bigger impact on market flows than the recent changes discussed at Jackson Hole. Both have seen slight gains this month, which signals weak selling of the dollar against most currencies.

Neutral Outlook for the Euro and Yen

The euro and yen are stable due to the strong performance of European and Japanese bond markets. This helps offset the selling pressure on the dollar. In the upcoming month, we expect selling pressure on the U.S. dollar against most currencies. The S&P 500 has gained 1.5% this August, causing large funds to sell dollar-denominated stocks to balance their portfolios. This selling is likely to influence dollar prices as the month ends. For traders, this indicates a strategy of betting on a weaker dollar, especially against commodity currencies like the Australian and Canadian dollars. Buying short-term call options on AUD/USD or NZD/USD could be a smart way to take advantage of this expected dollar decline. These rebalancing flows are usually predictable and can overshadow other market trends.

Euro and Yen as Exceptions

However, the euro and yen are expected to behave differently, likely staying stable against the dollar. The strong performance of European and Japanese government bonds this month is countering the weaker dollar trend. For example, German 10-year bund yields fell 20 basis points in August, balancing out pressures from US equity markets. This suggests selling short-term volatility in EUR/USD could be a good strategy. Last week’s comments from the Jackson Hole symposium should be seen as a minor factor for now. While the Fed hinted at a possible pause, the market is mainly focused on large month-end liquidity events. The lack of strong policy commitments means that these technical flows will dominate. This pattern is similar to what we observed in parts of 2023, where market flows often influenced currency movements when there were no major economic surprises. We predict this trend will continue over the next week or two. Therefore, opting for strategies that benefit from a gradual decline in the dollar or stable trading ranges is the wisest approach. Create your live VT Markets account and start trading now.

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