USD: Onwards and upwards? - Rabobank

Various currencies have pulled back a little ground vs. the USD this morning possibly on the lack of hawkish commentary from the Fed yesterday, but, the USD is still the best performing G10 currency on a 1 day view, points out Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“At the start of the week the DXY dollar index pushed through the 200 day simple moving average which further supported the improved technical picture for the greenback.  Last week, the USD had already broken key technical levels vs. the EUR and broad range of currencies.  Although there could be some further consolidation of these gains near-term, we see potential for further upside for the USD in the coming months.”

“While the EUR has lost some of its gloss, the recent drop in EUR/USD has been led by the broad-based improvement in the USD. Last week we revised down our target for the currency pair from 1.21 to 1.18 on the back of several factors including positioning, interest rate differentials and changing risk appetite.”

“Higher US interests and more concerns about world growth illustrate that the Goldilocks scenario that characterised much of 2017 has diminished. Yesterday’s FOMC policy announcement brought little new to the table, adding little to the market’s debate over whether US policy makers will hike rates by a total of three or four times this year.  While the market’s expectation of Fed 2018 policy has been fairly stable in recent months, expectations of policy from other central banks has erred towards being more dovish.”

“At the start of the year there was speculation in the market that 2018 could bring a string of policy moves from G10 central banks.  The BoJ, RBA and ECB are among the banks to have pushed back against this talk.  Meanwhile the Norges Bank has unwound some of its hawkish forward guidance, the BoC may be prepared to slow the pace of tightening and the market is now far less certain about the outlook for BoE rate hikes.  This backdrop is supportive for the USD.”

“Interest rate differentials have failed to give the USD much support for many months. However, over time they do tend to provide direction.  We would argue that in an environment of characterised by diminished risk appetite, fears about trade wars and slowing growth in the Eurozone, flows back into the USD could persist in the coming months.”