The Dollar moves forward
|- Greenback actively attacks opponents.
- Central banks take different paths.
The first expansion in manufacturing business activity in more than a year and the second government shutdown in the last five months have added fuel to the US dollar rally. The Purchasing Managers' Index reached 52.6, its highest level since August 2022. This is evidence of the strength of the US economy. The BLS has been forced to postpone the publication of labour market data due to the shutdown. Under these circumstances, the chances of a federal funds rate cut in June have fallen to 58%, pressuring EURUSD.
TD Securities believes the US dollar will strengthen by another 2% in February, as US data will begin to pleasantly surprise. Nevertheless, the USD index rally is an excellent opportunity to sell the greenback versus the Euro, Australian dollar, Pound and Swedish krona. The company expects EURUSD to rise to 1.22 in the third quarter.
Forecasts of a short-term strengthening of the US dollar seem logical. Donald Trump is dancing his tango (two steps forward, one step back) with tariff threats. So, the ‘sell America’ strategy has faded into the background. Scott Bessent denies US involvement in currency interventions. Markets considered Kevin Warsh to be the most hawkish possible candidate for the Fed chairmanship. The shutdown deprives the Fed of necessary data and prolongs the pause in the monetary easing cycle.
As a result, the futures market does not expect the Fed to ease its monetary policy until June. For four months, the federal funds rate will exceed the ECB deposit rate by 175 basis points. This creates ideal conditions for carry traders and EURUSD sales.
The euro's retreat allows the ECB to breathe a sigh of relief. The European Central Bank was on tenterhooks over fears that the main currency pair would settle above 1.2. This would have created headwinds for the eurozone's export-oriented economy. The step back of EURUSD makes the Governing Council meeting on 5 February boring.
The Bank of England is another matter. There was already a split within the Monetary Policy Committee. The simultaneous acceleration of inflation and cooling of the British labour market is exacerbating it. GBPUSD risks getting caught in a real storm when the results of the BoE's February meeting are announced.
Meanwhile, the Reserve Bank of Australia's cash rate hike has inspired AUDUSD bulls to launch a new attack.
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