Why have higher energy prices failed to trigger a stronger USD?
At a Glance
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.
Key Takeaways
- 01The weaker USD is linked to disappointing inflation data, showing a flat core inflation rate in June.
- 02Expectations of the Fed maintaining rates could provide longer-term support for the dollar.
- 03Higher energy prices have not catalyzed expected USD strength under current economic conditions.
- 04Market focus will shift towards economic data releases as they lead into critical Fed meetings.
Full Analysis
What the desk is arguing
The dollar's weakness seems to be fueled by recent softer economic data, particularly in inflation metrics. Per the full note from MUFG EMEA, the core inflation rate remained unchanged in June, significantly impacting the Fed's outlook and giving it additional leeway to potentially maintain interest rates during the upcoming meetings.
This disinflationary trend suggests the Fed is likely to pause on rate hikes for the immediate future, shifting focus to upcoming developments in inflation. This dovish shift contrasts with expectations from energy prices typically supporting USD strength, exemplifying market complexities.
Where it sits in our coverage
Our current consensus target for the USD is 1.075 against the EUR, with a range of 1.04 to 1.12. Notable firms include: - jpmorgan: Target of 1.10 for Mar26. - bofa: Contrarily targets 1.04 for Mar26.
This view aligns with the upper end of our consensus, emphasizing the potential for USD floor support as we navigate a shifting economic landscape.
How other firms see it
Most firms, including jpmorgan, view the weaker USD as a temporary phenomenon influenced by recent economic indicators. Conversely, bofa has taken a bearish stance, suggesting that external factors may still lead to a stronger USD than the current trajectory.
Consider monitoring the EUR/USD trajectory as it may reflect broader sentiments tied to U.S. economic performance and Fed policy evolution.
What the calendar says
No high-impact events appear scheduled in the next month that would directly influence these dynamics, keeping a stable environment for USD volatility into the summer period. The focus remains on how inflation data evolves leading into the Fed's next major decisions in September and October.
Market Implications
Watch for USD levels around 100 as a potential support, particularly as traders assess inflation data leading up to the September FOMC meeting.
From the original
Lee Hardman, Senior Currency Analyst, and Abdul-Ahad Lockhart, Currency Analyst, discuss what has been driving a weaker USD over the past week. In addition, they discuss if recent GBP outperformance will continue now that Andy Burnham has been confirmed as the new Labour leader.
Related speeches
4 itemsHow much further can the USD strengthen?
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.
FX Daily: Burnham’s first market wobble
The recent commentary highlights a widening rift in sentiments towards the GBP and USD, as new PM Andy Burnham's signals about fiscal flexibility have introduced notable volatility in UK markets. Per the full note [source], the pound is seen as vulnerable following this announcement, while the USD appears poised for further gains, particularly in light of geopolitical tensions exacerbating in the Gulf region. Our research indicates a current GBP/USD spot around 1.3500 amidst forecasts that modestly cluster around 1.3400, suggesting traders should position accordingly as developments unfold. Euro strength is also under scrutiny, with certain analysts targeting the EUR/USD rate back towards 1.140, indicating volatility across European currencies as well. As we navigate this multifaceted landscape, the undercurrents of fiscal shifts and military actions will continue to shape currency dynamics in the near term.