USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. 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 with incoming data for both the USD and US10Y . The Aug CPI saw markets price out the likelihood of a soft landing and subsequent price action saw typical bear market behaviour with heightened volatility across major asset classes giving the USD a big bout of safe haven inflows. This past week, the BoE’s attempt to calm down the bond market & threat of Yuan intervention saw some mild pressure in the USD.
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 data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a higher than 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. With some lingering expectations of a possible ‘soft landing’ for the US economy, any goldilocks data (higher growth & labour but lower inflation data) could trigger safe haven outflows from the USD and into US equities. 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 hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The upcoming week is full of important data with the two ISM prints and of course NFP. Even though the USD is expected to trade cyclically with incoming data, we do need to keep an open mind about goldilocks data (higher growth and lower inflation ) as that could see a nuanced reaction in the USD.
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. 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 with incoming data for both the USD and US10Y . The Aug CPI saw markets price out the likelihood of a soft landing and subsequent price action saw typical bear market behaviour with heightened volatility across major asset classes giving the USD a big bout of safe haven inflows. This past week, the BoE’s attempt to calm down the bond market & threat of Yuan intervention saw some mild pressure in the USD.
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 data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a higher than 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. With some lingering expectations of a possible ‘soft landing’ for the US economy, any goldilocks data (higher growth & labour but lower inflation data) could trigger safe haven outflows from the USD and into US equities. 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 hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The upcoming week is full of important data with the two ISM prints and of course NFP. Even though the USD is expected to trade cyclically with incoming data, we do need to keep an open mind about goldilocks data (higher growth and lower inflation ) as that could see a nuanced reaction in the USD.