US Dollar: Softer data challenges resilience – MUFG

MUFG's analysts Derek Halpenny and Lee Hardman have observed that weaker U.S. economic data and declining short-term Treasury yields are weakening the U.S. Dollar (USD), despite the Dollar Index (DXY) staying above its 200-day moving average near 99.200. They point to softer retail sales, Nonfarm Payrolls (NFP) and Consumer Price Index (CPI), reduced Federal Reserve (Fed) hike pricing, and anticipate a modest dollar weakness heading into the following year.

The flattening of the U.S. yield curve, due to lower short-term yields, creates an unfavorable environment for the USD, though it hasn't yet prompted another decline in the DXY this month.

The DXY has not yet tested support from its 200-day moving average, which stands at approximately 99.200. The persistent flow of softer U.S. economic data has encouraged market participants to adjust their expectations for Fed rate hikes. By July 24th, the U.S. rates market was pricing in around 57 basis points of Fed hikes by April of the next year, including a hike in September that was fully priced in. Overall, these recent trends support the forecast of the U.S. dollar weakening further in the coming year.