US Dollar: Fed tightening risks keep outlook bullish – OCBC
OCBC’s Sim Moh Siong and Christopher Wong highlight renewed Dollar support from higher Oil prices, rising US yields and resilient US labour data as markets reassess Federal Reserve tightening risks.
OCBC analysts Sim Moh Siong and Christopher Wong emphasize renewed strength in the US Dollar, driven by higher oil prices, rising US yields, and resilient US labor market data. Despite softer June inflation allowing the Federal Reserve to remain patient, they contend that ongoing US economic resilience should eventually reignite concerns about tightening, maintaining a moderately bullish outlook for the USD over the next one to two quarters.
Global yields surged the previous night, bolstering the USD, as optimism over the reopening of the Strait of Hormuz waned. Notably, the widening gap between US and European yields, possibly prompted by speculation that Fed Chair Jerome Powell might endorse a rate hike at the September meeting if inflation remains high, played a significant role.
The labor market also delivered a solid performance, with initial jobless claims increasing only slightly to 199k, well below expectations and continuing a downward trend for three consecutive weeks. This data suggests underlying strength in the labor market, reinforcing the case for a bullish USD stance in the coming months. While easing inflation has provided the Fed with room to take a cautious approach, the ongoing debate about the Fed's reaction function has tempered upside momentum for the USD.
Nonetheless, sustained US economic robustness is expected to bring Fed tightening risks back into the spotlight, supporting the analysts' moderately bullish outlook for the USD over the next one to two quarters.
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