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The US dollar posted a strong comeback yesterday, with no real spark for the action other than a parting of the clouds in the negotiations between Greece and its creditors. This suggests that USD remains a more pro-cyclical trade (i.e., performs best with stronger risk appetite.).

The next few sessions will be about determining whether the move was meaningful enough to gain further traction from longer-term USD bulls, or whether everyone is so sceptical on the US recovery that we need to wait for next week’s data to see the writing on the wall before buying dollars (or selling them, depending on the data.)

Little note was paid yesterday to the Federal Reserve's Jerome Powell (on the Board of Governors and therefore a voter) who yesterday said he saw potential for a September rate hike and another hike in December on the expectation that US economic growth will remain strong and that inflation will rise and job market will continue to improve.

He suggested odds were 50-50 for this outcome. The market remains somewhere south of this estimation on the likely Fed funds rate by the end of this year, as everyone will focus on incoming data – but Powell’s words remind us that the market will have to make a rather sharp adjustment higher in its expectations if the next couple of data cycles from the US show further improvement.

USD: A smart rally, particularly in the most major USD pairs, certainly offers encouragement for the USD bulls, though we may need to see a catalyst that impresses sufficiently to shift US rates higher before we see a more durable rally from the greenback.

EUR: The latest focus on the Greek negotiations is on the compressed timeline for ramming through a deal in time for the June 30 payment to the IMF, though it’s hard to see how a technicality can hold up the process as long as the parties are in agreement in principle.

Also potentially an issue is the reception of the deal in the Greek parliament. In any case, markets have fully priced in a deal, so we will be victim to intraday volatility on headlines that raise the spectre that the deal is not progressing quickly to the finish line.

JPY: Weak overnight as strong risk appetite and higher yields are not the stuff to support the yen. Also, Bank of Japan minutes (from the meeting before the most recent one – aren’t we all looking forward to the new meeting/minutes schedule in 2016…) saw some members expressing concern on recent low inflation and weak industrial production, though optimism was expressed on the state of domestic demand.

GBP: Strength versus the euro very much deserves on the comeback in risk appetite and the sharply higher rates at the front end of the UK yield curve. The UK-US spread is at a new wide (over 20 basis points in UK’s favour) since last December as well, so we need to see the US news picking up for any fundamental support for a move lower in GBPUSD.

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