USD: Moderately hawkish remarks by Powell – ING

The US Dollar (USD) is testing the limit of stretched positioning, but macro developments have so far failed to offer any real catalyst for a substantial unwinding of the greenback’s longs. The set of inflation figures for October have kept markets somewhat reticent to fully price in a December cut from the Federal Reserve, as both CPI and PPI’s core measures have printed at 0.3% month-on-month. That is simply too hot for the Fed to turn the dial to a more dovish narrative, ING’s FX analyst Francesco Pesole notes.

USD is due a correction

“And indeed, the remarks by Fed Chair Jerome Powell in Dallas yesterday seemed to endorse markets’ cautious pricing on Fed easing, giving some support to the dollar towards the end of the New York session. Powell seemed to put greater emphasis on the strength of the economy and how that allows the central bank to approach the upcoming policy decisions “carefully”. Market expectations for a cut in December declined by around 5bp after his comments and are now at 15bp.”

“Today, there is another chance for a dollar positioning-led correction as retail sales for October are published. Consensus is for a marginal slowdown across all retail sales indices compared to September, while still remaining in positive MoM territory. It probably won’t take much to trigger a negative dollar reaction, but the recent momentum has been rather strong in US data.”

“Our short-term view remains that the USD is due a correction, and caution is warranted when chasing the current rally much further. However, when we look ahead and consider incoming US president Donald Trump’s policy mix, we remain of the view that markets will favour a structurally strong USD.”