USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction for both the USD and US10Y (good data expected to be supportive for the USD and US yields while bad data is expected to pressure the USD and US yields). The Fed is still under pressure to continue hiking rates and ramping up QT, but last week’s decent deceleration in the OCT CPI report has given markets some solace from inflation angst. Money markets shed about 30bsp off the implied terminal rate. As a result of this the USD saw intense selling but has largely stabilized this week. Like we’ve said many times, right now is all about the data. The data will lead the Fed, which means the data is what we should follow for high probability short-term directional flows for the USD. In the week ahead, the only major data highlight is the S&P Global Flash PMIs and perhaps the FOMC meeting minutes.
POSSIBLE BULLISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.5% terminal rate can trigger further USD upside.
POSSIBLE BEARISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays aggressively hawkish and cyclical concerns put pressure on risk sentiment. However, it’s also important to remember that the data leads the Fed. That means, even though the USD remains fundamentally bullish in the currency negative cyclical environment, it’s short-term direction will largely be determined by the incoming data. Thus, in the current context, we prefer trading the USD in the short-term with scalps out of key US economic data points.
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction for both the USD and US10Y (good data expected to be supportive for the USD and US yields while bad data is expected to pressure the USD and US yields). The Fed is still under pressure to continue hiking rates and ramping up QT, but last week’s decent deceleration in the OCT CPI report has given markets some solace from inflation angst. Money markets shed about 30bsp off the implied terminal rate. As a result of this the USD saw intense selling but has largely stabilized this week. Like we’ve said many times, right now is all about the data. The data will lead the Fed, which means the data is what we should follow for high probability short-term directional flows for the USD. In the week ahead, the only major data highlight is the S&P Global Flash PMIs and perhaps the FOMC meeting minutes.
POSSIBLE BULLISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.5% terminal rate can trigger further USD upside.
POSSIBLE BEARISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays aggressively hawkish and cyclical concerns put pressure on risk sentiment. However, it’s also important to remember that the data leads the Fed. That means, even though the USD remains fundamentally bullish in the currency negative cyclical environment, it’s short-term direction will largely be determined by the incoming data. Thus, in the current context, we prefer trading the USD in the short-term with scalps out of key US economic data points.