US Dollar: Data-dependent Fed keeps upside in check – OCBC

OCBC’s Christopher Wong and Sim Moh Siong note that softer US inflation and debate over the Fed’s reaction function have eroded US Dollar upside momentum, even as the Fed remains data dependent. Upcoming US employment data are seen as critical for policy direction. Continued US economic resilience is expected to eventually revive Fed tightening risks and support a moderately bullish US Dollar over the next one to two quarters.

Fed risks and USD outlook

"The Fed remains firmly data dependent. Encouraging inflation readings in June have given policymakers room to wait for further evidence before adjusting policy. At the same time, growing debate over whether the Fed’s reaction function has shifted has contributed to a loss of USD upside momentum."

"The market is increasingly positioned for lower oil, lower real rates and a softer USD. Gold is leading that trade. But resilient US data could ultimately revive Fed tightening concerns and lend support to the USD."

"Near-term momentum has improved, with Friday’s upcoming US payrolls report now key to whether the decline in yields, USD and gold’s breakout can be sustained."

"Even so, the Fed has missed its inflation target for more than five years and is unlikely to tolerate a renewed lack of progress on inflation, regardless of whether recent price pressures were driven by exogenous shocks. We remain mindful of that risk. Upcoming data, particularly Friday’s employment report, will be critical in shaping the Fed’s next move. Continued US economic resilience should eventually bring Fed tightening risks back into focus, supporting our moderately bullish USD view over the next one to two quarters."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)