US Dollar: Resilient growth supports upside through 1H27 – OCBC

OCBC’s Sim Moh Siong and Christopher Wong note that hotter US CPI has revived Federal Reserve tightening fears, but the US Dollar’s rally has been constrained by reversing Treasury yields and AI-led equity weakness. They expect a Fed pause in October followed by a December hike, and see resilient US growth and AI investment keeping the Dollar firm through 1H27, though equity sensitivity to financing costs may cap further upside.

Fed path and AI equities shape USD

"September US CPI gave the USD a lift as sticky inflation revived fears of further Fed tightening. Core CPI rose 0.3% MoM, above the 0.2% consensus and matching August, while headline inflation accelerated to 3.7% YoY. The upside surprise keeps the 27-28 October meeting live."

"However, given recent Fed guidance, we continue to expect a pause in October, followed by another hike in December."

"This creates a more nuanced USD backdrop. Sticky inflation and a more hawkish Fed path remain supportive, but a deeper AI-led equity correction could become a headwind if it weakens capital inflows into US risk assets and erodes the positive wealth effects that have helped underpin a resilient US economy. That could leave the USD firm without necessarily producing another sharp leg higher."

"Attention now turns to Kevin Warsh’s fireside chat with IMF Managing Director Kristalina Georgieva on 16 October. The event is confirmed on the IMF calendar, while the Fed lists the discussion ahead of its 27-28 October FOMC meeting. With markets now assigning meaningful odds to an October hike, investors will scrutinise Warsh for any hint that the Fed is leaning toward moving sooner rather than waiting until December."

"Our base case remains that resilient US growth, supported by robust AI investment, keeps the USD firm through 1H27. But with the AI equity boom increasingly sensitive to higher financing costs, the same theme that has supported resilient US growth could also become a constraint on further USD upside."

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