FUNDAMENTAL BIAS: WEAK BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven, demand for the Dollar drastically diminished at the latter part of 2021 as the market’s attention shifted away from the pandemic and towards an expected global synchronized recovery and a reflation environment (both of which is usually Dollar negative). As long as the global economy is expected to perform well, that places pressure on the greenback, despite the outlook for the US economy also moving from strength to strength.
2. The Monetary Policy outlook for the FED
A persistent bearish factor for USD is the Fed's highly accommodative monetary policy stance as the central bank has made it abundantly clear that they will look past any near-term rise in inflation and continue their current easy policy for the foreseeable future, until they have seen actual progress in the economy, not forecasted improvement. It’s clear that the FED is purposefully behind the curve right now and even with recent positive data they have stressed that they need to see a lot more improvements before they are ready to lift the foot of the stimulus pedal. The recent inflation print has given them a lot to think about, but they have stuck to the script and explained they need to see more movement towards substantial progress in the economy as well as the virus situation before they will entertain any discussions about tapering. With the FED’s April minutes opening the door for tapering discussions (and already talking about talking about them) it does mean the FED is moving closer to tapering discussions. Until now the US economic performance hasn’t been enough to turn the Dollar around, but if the market starts to price in a less dovish FED in the months ahead, the economic outperformance of the US will start to matter for the Dollar and could eventually lead to a strong USD in the quarters ahead.
3. Factors lessening the pressure on the Dollar
Even though the bias on the Dollar remains titled lower in the med-term given the outlook for the global economy as well as the FED’s policy stance, there has been numerous positive developments for the USD to pay attention to such as (1) continuously improving real yield differentials with the recent push higher in US10Y; (2) continuously improving growth differentials (with the newly announced fiscal stimulus and more expected); (3) policy normalization expectations (even though the FED has kept to their dovish tune the market is not buying the lowerfor-longer visage as Eurodollar futures have been implying faster hikes compared to the FED’s guidance. Even though the med-term bias for the Dollar remains titled lower, the outlook has improved, and it’ll be important to monitor the above-mentioned points for their short-term impact on the greenback.
1. Developments surrounding the global risk outlook.
As a safe-haven, demand for the Dollar drastically diminished at the latter part of 2021 as the market’s attention shifted away from the pandemic and towards an expected global synchronized recovery and a reflation environment (both of which is usually Dollar negative). As long as the global economy is expected to perform well, that places pressure on the greenback, despite the outlook for the US economy also moving from strength to strength.
2. The Monetary Policy outlook for the FED
A persistent bearish factor for USD is the Fed's highly accommodative monetary policy stance as the central bank has made it abundantly clear that they will look past any near-term rise in inflation and continue their current easy policy for the foreseeable future, until they have seen actual progress in the economy, not forecasted improvement. It’s clear that the FED is purposefully behind the curve right now and even with recent positive data they have stressed that they need to see a lot more improvements before they are ready to lift the foot of the stimulus pedal. The recent inflation print has given them a lot to think about, but they have stuck to the script and explained they need to see more movement towards substantial progress in the economy as well as the virus situation before they will entertain any discussions about tapering. With the FED’s April minutes opening the door for tapering discussions (and already talking about talking about them) it does mean the FED is moving closer to tapering discussions. Until now the US economic performance hasn’t been enough to turn the Dollar around, but if the market starts to price in a less dovish FED in the months ahead, the economic outperformance of the US will start to matter for the Dollar and could eventually lead to a strong USD in the quarters ahead.
3. Factors lessening the pressure on the Dollar
Even though the bias on the Dollar remains titled lower in the med-term given the outlook for the global economy as well as the FED’s policy stance, there has been numerous positive developments for the USD to pay attention to such as (1) continuously improving real yield differentials with the recent push higher in US10Y; (2) continuously improving growth differentials (with the newly announced fiscal stimulus and more expected); (3) policy normalization expectations (even though the FED has kept to their dovish tune the market is not buying the lowerfor-longer visage as Eurodollar futures have been implying faster hikes compared to the FED’s guidance. Even though the med-term bias for the Dollar remains titled lower, the outlook has improved, and it’ll be important to monitor the above-mentioned points for their short-term impact on the greenback.