USD bearish bias for now, but caution after 5% drop in one week – MUFG

Does peak inflation mean peak Dollar? Developments last week have led analysts at MUFG Bank to turn USD bearish over the short-term at least.

Have we just passed the three peaks?

“After a significant CPI downside surprise, we have seen a big drop in US yields and the US dollar which leads to the justifiable question – have we just seen the three peaks for inflation, rates and the US Dollar. Of the three, it is the USD that would have to do the most work to get to new highs – about a 7% gain would be needed.”

“The inflation data is just one month of data but the pipeline data available does suggest the decline can be extended further over the coming months. That could then mean a peak in rates could also have been achieved. The Fed is set to remain hawkish though which may limit the scale of any further decline.”

“While it makes sense to hold a bearish view now on the USD with the potential for some further signs of easing inflation, the DXY index is now over 5% down since last Friday and hence selling on rallies might make more sense from here.”