OCBC strategists Sim Moh Siong and Christopher Wong argue the US Dollar (USD) remains supported by higher Oil prices, firm US yields and resilient Federal Reserve (Fed) expectations, but not yet breaking out of its recent range. They note markets are focused on energy, US inflation and earnings, with a decisive USD move likely requiring a meaningful upside surprise in core CPI. The base case is for a supported but range-bound USD.
Dollar support tied to core CPI
"Our base case remains that the USD should stay well supported. That said, risk-sensitive currencies and EM carry trades could see a period of relief if energy prices stabilise and geopolitical tensions fade. However, we do not believe the conditions are yet in place for a decisive USD breakout from its recent range."
"Markets currently expect the Fed to remain on hold in October before delivering a fully priced 25bp rate hike in December. The key question for the USD is whether upcoming CPI data can alter that sequencing by bringing forward expectations for further tightening. Consensus forecasts point to firmer headline inflation due to higher energy costs, but core inflation is expected to remain relatively contained."
"If core inflation moderates as expected, markets could further trim expectations for additional Fed tightening, limiting the scope for further USD gains. In our view, it would likely take a core CPI print of 0.4% m/m or higher to materially shift market pricing and strengthen the case for earlier Fed action. Until then, the USD is likely to remain supported but not break decisively higher."
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