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 , 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 itemsWhy have higher energy prices failed to trigger a stronger USD?
In recent discussions, it has been noted that higher energy prices have not led to a stronger USD, primarily due to disappointing US economic data and a more dovish stance from the Federal Reserve. Per the full note from MUFG EMEA, the dollar index has seen downward pressure largely driven by a sharp decline in inflation, which was evident in June's data, where core inflation was flat, surprising markets and giving the Fed room to maintain rates. With no major inflation catalysts expected in the near term, attention should shift to how these dynamics may influence USD positioning ahead of fall meetings and midterm elections.
Are fundamental drivers falling into place for a stronger JPY?
The desk posits that the recent rebound in the Japanese yen is driven by fundamental factors rather than intervention, suggesting a potentially more sustainable strength moving forward. Per the full note from MUFG, the yen strengthened significantly, with USD/JPY dropping from around 160 to closer to 155, indicating a pivotal shift. This movement coincides with reports from the Bank of Japan (BoJ) showing stable current account data, reinforcing that the yen’s appreciation may continue. As sentiment builds around this fundamental shift, institutional traders should monitor the critical 155 support level closely, as its breach could signal further upside for the yen, particularly in light of the current macroeconomic landscape.