Why the US dollar is grinding higher ahead of cuts - BAML

Author: Adam Button | Category: News

What's boosting the US dollar

Bank of America Merrill Lynch Global Research discusses the USD outlook and notes that it's a challenging proposition for long USD positions predicated on corrective interest rate pricing.

"The trajectory of the dollar around first Fed cuts is typically lower, and yet over the last two weeks this is not what we have seen. Indeed, USD resilience this time around has bucked the trend. Why? Relative economic performance has strongly favored the US, leading to rate differentials moving in a direction generally supportive of USD of late. This was punctuated last week by the release of a surprisingly weak Euro Area manufacturing PMI reading, which fell further to 46.4. Given the historically depressed level of relative US economic surprises, we suspect that perception of cyclical divergence can be a driver of shorter-term USD gains ahead, particularly given liquidation potential of EUR/USD longs persistently held by the asset manager community," BofAML argues. 

"In this environment, the outlook for EURUSD is mixed. EURUSD is currently consistent with data and rate differentials. It is undervalued by about 10% according to our estimates, but Eurozone data have been weaker than US data and US yields are higher...In this context, although our forecasts remain constructive on EURUSD based on valuation arguments, it is hard to have a strong view," BofAML adds.

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