USD: Still upside risks into the election – ING

The US Dollar (USD) continues to benefit from a wide range of supporting factors. US 10-year Treasury yields have risen by 15bp since the start of the week, the 2-year USD OIS is inching higher again with only 37bp of Fed easing now in the price, oil prices are rebounding and the proximity to a closely contested US election can continue to favour deleveraging and defensive repositioning, ING’s FX Francesco Pesole notes.

USD benefits from a wide range of supporting factors

“One of our key calls for the next two weeks is that implied 1M volatility in USD crosses has room to become increasingly expensive relative to historical volatility, following a path similar to the pre-election period in 2020 and 2016. Also, a potential dry-up in FX liquidity next week can lead to less liquid currencies (like NOK in G10) underperforming.”

“In the US, the data calendar remains light, with only MBA mortgage applications and home sales figures released today. Expect some potential market impact from the Fed’s Beige Book, which has grown in relevance lately. Four months ago, nine of 12 Fed banks reported growth, but by 4 September, only three did. This likely influenced the Fed’s September 50bp rate cut, with further weakness expected to prompt more easing.”

“On the Fedspeak front, we’ll hear from Bowman and Barkin today, with the former being arguably the most hawkish voice in the FOMC. We could see some mid-week loss of momentum for the dollar today, but the balance of risks remains skewed to the upside into the election.”