DXY: US dollar to strengthen further in the near-term

Analysts at MUFG Bank see more gains ahead of the US dollar as stronger economic data highlights that fears over a sharp slowdown in the United States and recent weakness are overdone.

Key Quotes:

“The USD is deriving support from the ongoing correction higher in US yields. The 10-year US Treasury yield is still rising back towards 2.00% where it was trading prior to the summer growth scare. The inversion of the US yield curve is reversing as the market participants scale back fears over a sharper US slowdown. Two of the most important US economic data releases; the latest NFP report and ISM nonmanufacturing survey both helped to ease growth concerns. We do not expect the upcoming releases of latest retail sales and CPI reports to trigger a reversal of USD strength.”

“Progress towards a US-China partial trade deal which removes the threat of further taxes on US consumers is supportive for higher US yields and a stronger USD. We expect Fed Chair Powell to strike a cautiously optimistic tone in his semi-annual testimony. Further cuts are not needed right now.”

“We expect the USD to strengthen further in the near-term. The dollar index has retraced less than half of October’s sell-off. Stronger US data combined with improving global investor risk sentiment favours further USD upside especially against the lower yielding G10 currencies. Stronger US economic data reinforces expectations that the Fed has “paused” their rate cut cycle and will encourage higher yields at the long end of the US curve. A decisive break above the end of October DXY highs at the 98.00-level wIll open up further gains back towards the 99.00- level. One risk to our bullish USD view is that Asian FX strength could spill over into broader USD weakness.”

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