USD to firm in the short term - Natixis

Nordine NAAM, Research Analyst at Natixis, notes that the US dollar recovered over the course of last week following Emmanuel Macron’s victory and a series of statements by FOMC members calling for further monetary normalisation.

Key Quotes

“The euro came in for some profit-taking, which was also favourable to the greenback. Now that political risks have dissipated, the market’s focus will shift back to economic fundamentals, in particular changes in the monetary policies of the world’s leading central banks.”

“Given the solidity of the latest macroeconomic indicators, notably as regards employment in the US, several FOMC members made a case once again for raising the Fed Funds rate three times this year. They clearly want to prepare the market for a 25bp hike when the FOMC meets on 14 June, the probability now being priced at 100%. On the other hand, the Fed Funds curve remains excessively flat further out until end-2018, as just three hikes are priced in when our own expectations are for five hikes.”

“In the short term, the US dollar will continue to firm as we move nearer the next FOMC meeting. In the interval, the market will focus on macroeconomic indicators, notably retail sales, housing starts, industrial production and the Philly Fed index, and also speeches by FOMC members.”

“The market will also have one eye on the sacking of the FBI Director, were ever this to balloon given that James Comey was involved in an inquiry susceptible of implicating Donald Trump over just what sorts of relations he had with Russia. Democrats are pressing for the appointment of a special prosecutor to complete this investigation, but Republicans are stonewalling. Be that as it may, this latest affair risk delaying further the announcement of economic stimulus measures this year, as it will further strain relations with Congress, which will take an even harder line on any proposed spending hikes. All in all, we see the DXY dollar index recovering back above 100 in coming weeks.”