US Dollar Index looks primed to breakdown to fresh 2021 lows – Westpac

Federal Reserve officials confirm a tapering discussion at upcoming meetings may occur, but with substantial progress unlikely to be achieved until late 2021 – the Fed will stick to their patient script – undercutting the US Dollar Index (DXY), in the view of economists at Westpac.

BoC tapering and policy lift-off guidance from the RBNZ and Norges Bank add to challenging USD narrative

“A breakdown in DXY to fresh 2021 appears to be just a matter of time, even as short-term sentiment and positioning metrics suggest the DXY’s slow bleed lower is looking very mature.”

“Vice Chair Clarida and Governor Quarles backed the FOMC minutes’ signal that they will begin a tapering discussion at upcoming meetings if the recovery unfolds as expected. That will throw a lifeline for the DXY, but with substantial progress on the economy unlikely to be achieved until late 2021, sustained taper-driven DXY upside is likely to prove fleeting. Until then, the Fed’s resolutely dovish stance and excess liquidity conditions at the front-end will leave the front-end well contained.”

“External factors are having their say in DXY trends too, including firming Eurozone activity rebound conditions, BoC tapering and policy normalisation signals from the likes of the RBNZ and Norges Bank.”

“DXY gains beyond 91.5 unlikely to have legs.”