Economists at Barclays Bank suggest a complex forecast for the US dollar, considering factors like the potential resolution of the US debt ceiling issue, unexpected softening of Chinese data, and the strength in recent US data.
US Dollar Rally and Exchange Rate Forecast
Barclay's analysts note the recent rally of the US dollar amid potential resolution of the country's debt ceiling situation, leading to rising equities and yields.
"The dollar rallied amid headlines of a potential resolution in the debt ceiling situation, with equities and yields rising in tandem," says Themistoklis Fiotakis, Head of FX Research at Barclays.
However, he indicates uncertainty about the future of this rally, stating that, "Whether the dollar rally extends from here depends on the texture of an agreement. Republicans want big spending cuts and larger-than-projected concessions could imply lower yield support for the USD down the road."
Fiotakis further discusses the potential impact of the debt ceiling negotiations on the US dollar, explaining that an impasse could lead to market unease as the deadline for a resolution approaches. He observes, "The closer we get to the x-date with no signs of a resolution, market jitters might propel both sides towards a short-term extension or a kicking the can down the road scenario."
On a different note, he also refers to the possibility of the dollar rally offering an opportunity for entering into short positions, suggesting, "The dollar rally could ultimately offer an entry point into short positions. The strength in recent data (jobless claims most recently) may mean that waiting until a potential Fed hike in June is nearly fully priced."
Chinese Data and USD Outlook
The Barclays analyst shifts the conversation to an unexpected element affecting the dollar's outlook: the softening of Chinese data. He explains how this reversal affects one of the pillars that was supporting the dollar sell-off.
"The main worry is that more data weakness may be required before Chinese authorities ease policies again," says Fiotakis.
"Specifically, the conspicuous and unexpected deceleration in Chinese data has reversed one of the three big pillars of the dollar sell-off along with natural gas and peak Fed)", he adds.
The analyst also touches on the potential room for further upside in
CNY
and the volatility in EM FX.
He states, "For CNY there is some, albeit limited, room for further material upside in $CNY. Where things can remain a bit more volatile is high carry EM FX, where positioning is quite elevated."
US Dollar Rally and Exchange Rate Forecast
Barclay's analysts note the recent rally of the US dollar amid potential resolution of the country's debt ceiling situation, leading to rising equities and yields.
"The dollar rallied amid headlines of a potential resolution in the debt ceiling situation, with equities and yields rising in tandem," says Themistoklis Fiotakis, Head of FX Research at Barclays.
However, he indicates uncertainty about the future of this rally, stating that, "Whether the dollar rally extends from here depends on the texture of an agreement. Republicans want big spending cuts and larger-than-projected concessions could imply lower yield support for the USD down the road."
Fiotakis further discusses the potential impact of the debt ceiling negotiations on the US dollar, explaining that an impasse could lead to market unease as the deadline for a resolution approaches. He observes, "The closer we get to the x-date with no signs of a resolution, market jitters might propel both sides towards a short-term extension or a kicking the can down the road scenario."
On a different note, he also refers to the possibility of the dollar rally offering an opportunity for entering into short positions, suggesting, "The dollar rally could ultimately offer an entry point into short positions. The strength in recent data (jobless claims most recently) may mean that waiting until a potential Fed hike in June is nearly fully priced."
Chinese Data and USD Outlook
The Barclays analyst shifts the conversation to an unexpected element affecting the dollar's outlook: the softening of Chinese data. He explains how this reversal affects one of the pillars that was supporting the dollar sell-off.
"The main worry is that more data weakness may be required before Chinese authorities ease policies again," says Fiotakis.
"Specifically, the conspicuous and unexpected deceleration in Chinese data has reversed one of the three big pillars of the dollar sell-off along with natural gas and peak Fed)", he adds.
The analyst also touches on the potential room for further upside in
CNY
and the volatility in EM FX. He states, "For CNY there is some, albeit limited, room for further material upside in $CNY. Where things can remain a bit more volatile is high carry EM FX, where positioning is quite elevated."