This week's price action has given us a glimpse of what's to come in the forex market in Trump's second term, with a brief dollar correction being taken as an opportunity to enter structural USD long positions at more attractive levels, notes ING forex analyst Francesco Pesole.

"While our view is that the dollar will remain strong through next year, the near-term picture is still a bit more nuanced as long-term dollar positioning is starting to look quite stretched and a broader (albeit short-lived) dollar correction could be on the cards. One catalyst could be today's PPI print, which has greater relevance for core CPE – the Fed's preferred measure of inflation. Expectations are for a re-acceleration in headline PPI from 0.0% to 0.2% MoM, with the core measure flat at 0.2% MoM."

The focus will be on the economic outlook, and there is a Q&A session where he may be asked about the latest inflation figures and the implications of protectionism for monetary policy. Here too, the risks are skewed to the downside for the dollar given the stretched positioning, as Powell may want to avoid linking Trump's expected policy and the Fed's decision.

This could be read as a rather dovish message and prompt some lower pricing in the USD OIS curve which conservatively only prices 50bp of easing by mid-2025. A USD-led positioning correction may fail to take the DXY back below 106.0, and interest in buying dollar dips is likely to emerge soon."

Source : FXStreet