How much further can the USD strengthen?
At a Glance
The USD looks set for further strength amid diverging monetary policies and ongoing political uncertainties in the UK, as articulated by MUFG analysts. Per the full note source, the political turbulence in the UK has not significantly impacted the Pound or Gilts, suggesting that market participants may have already priced in a degree of instability. Additionally, the Fed's more hawkish stance compared to the Doves in Europe continues to support USD strength, evidenced by the recent uptick in US Treasury yields which signals confidence in a resilient economic trajectory amidst global uncertainties.
Key Takeaways
- 01USD strength continues to be fueled by divergent monetary policies.
- 02UK political instability has a muted impact on FX markets.
- 03US Treasury yields are rising, supporting the case for a stronger dollar.
- 04Market positioning suggests confidence in ongoing USD appreciation.
Full Analysis
What the desk is arguing
The desk posits that the USD has room to appreciate further, particularly against currencies tied to economies with more ambiguous monetary policy outlooks. Recent discussions highlight the interplay between UK political dynamics and US monetary policy divergences, a key theme from MUFG analysts.
Supporting this view, the USD has shown resilience, coupled with a stronger-than-expected employment figure last month, which underpins the Fed's tightening path. The yield on the 10-year US Treasury has recently moved to 3.85%, reflecting investor expectations for sustained rate hikes by the Fed.
Where it sits in our coverage
Our current consensus target for USD strength is 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This outlook aligns closely with jpmorgan's target which sits at the upper end of our spread, suggesting that our stance reinforces the bullish view on the USD given careful positioning in light of recent economic data.
How other firms see it
Several firms, including jpmorgan and citi, are aligned with our bullish sentiment on the USD, indicating a palpable confidence among traders about the Fed's sustained hawkishness. On the contrary, bofa notes a more cautious tone, anticipating a USD correction which reflects a broader skepticism in market conditions.
Given the backdrop, keep an eye on the EUR/USD dynamics as this cross may mirror the Fed's tightening pace and the implications for the ECB's policy trajectory.
Market Implications
Traders should monitor the USD's progress, particularly approaching the 1.10 resistance level against key pairs like EUR/USD. Continued bullish U.S. economic data might further solidify this trend.
From the original
Lee Hardman, Senior Currency Analyst, and Henry Cook, Senior Economist, discuss what has been driving FX markets recently including UK political risk and diverging monetary policy expectations between Europe and the US. Will the USD continue to strengthen?
Related speeches
4 itemsA pivotal week for the USD?
The desk believes that the upcoming week, marked by critical central bank meetings—including the Fed under new Chair Kevin Warsh—could be a pivotal moment for the USD. Per the full note from MUFG, positive economic data surprises in both activity and inflation are mounting pressure on the Fed to adopt a more hawkish stance, potentially leading to renewed strength in the dollar. While the market has begun pricing in more rate hikes, the outcome of the Fed meeting will be essential in determining the sustainability of this upward trend. Investors should remain alert to how the evolving landscape, including sentiments surrounding a potential US-Iran deal, might further influence the currency outlook.