Investng.com — On Monday, market dynamics indicate a possible rise in the currency pair. Throughout May, the dollar has shown weakness as risk sentiment has strengthened alongside expectations of a policy easing by the Federal Reserve. Nevertheless, markets are looking for a new catalyst that goes beyond data and can drive significant moves.
Soft data for existing home sales and durable goods orders are expected this week, in line with the general consensus. Similarly, the S&P PMIs released on Thursday are forecast to be subdued and considered less critical compared to the ISM surveys.
The minutes of the May 1 Federal Open Market Committee (FOMC) meeting are expected to be revealing. The May meeting fell short of the expectations of those with an hawkish view, and since then members like Neel Kashkari have hinted at the possibility of another rate hike, if necessary. The focus of the minutes will likely be the committee’s rationale for maintaining a broadly optimistic view on disinflation, which could shape the relationship between future data and monetary policy.
Unless there are unexpected indications of rate hikes or an extremely dovish stance within the committee, the immediate effects on the foreign exchange market could be minimal. A period of low volatility and a wait-and-see attitude is expected ahead of the release of the core personal consumption expenditure (PCE) price index on May 31. The DXY is forecast to stabilize between 104 and 105 this week, with a slight move to the upside as the market could continue to reverse the post-CPI rally seen in procyclical currencies.
Additional upward pressure on the dollar may come from tightening oil markets following the death of Iranian President Ebrahim Raisi in a helicopter crash and health concerns involving Saudi King Salman Bin Abdulaziz. However, the impact of these events in the Middle East on the market has so far been limited.
In a low volatility environment, the yen tends to underperform as yen-financed carry trades gain popularity. The current short position in the JPY, which represents 42% of open interest according to CFTC data, demonstrates this trend. This positioning has fallen from 54% a month earlier. The market’s skepticism regarding the sustainability of Japan’s currency interventions could make it difficult to predict a spike for the USD/JPY. At this point, a return to the 156.50 region seen before the release of the US CPI data is considered likely within a week. If the expected slowdown in Japanese inflation for April is confirmed on Friday, it could trigger further gains in the USD/JPY pair.
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