In February, the US dollar remained relatively stable despite notable shifts in the rates markets. The 2-year UST note yield surged by 41 basis points, reaching 4.62%, driven by robust US employment and CPI reports, prompting a substantial reduction in anticipated rate cuts. While market expectations in January suggested a potential 148 basis points of rate cuts for the year, this has now decreased to 82 basis points. The initial January projection of excessive rate cuts has given way to a current stance that appears somewhat conservative.

The Federal Reserve may opt to postpone rate cuts until June; however, if economic growth weakens and inflation approaches the target, the Federal Open Market Committee (FOMC) might consider cuts in subsequent meetings, amounting to a total of 125 basis points. The Dots profile at the March meeting might remain unchanged, reflecting a 75 basis point reduction, but potential cuts could commence in June if economic trends persist.

Certain indicators, such as rents and core services excluding housing, remain persistent, although moderating wage growth is expected to ease upward pressure on underlying inflation. Despite widespread optimism regarding the ongoing resilience of the US economy, there is skepticism about the sustainability of certain key factors contributing to its strength. Notably, large fiscal stimulus support (CHIPS, IRA) and excess consumer savings are expected to wane, no longer providing robust support for growth amid ongoing policy tightening.

Concerns over Commercial Real Estate have exacerbated weaknesses in bank lending, highlighted by challenges faced by regional banks in February. The start of the year witnessed declines in retail sales and manufacturing production, with a 0.8% month-on-month decrease in retail sales in January and a 0.5% decline in manufacturing production. The consensus real GDP estimate for Q1, at 2.0% quarter-on-quarter seasonally adjusted annual rate (SAAR), appears optimistic.

Consumer confidence has declined, reflected in the NFIB Small Business Optimism index dropping to 89.9, well below the long-term average of 98.0. Hiring plans have reached their lowest level since the onset of the pandemic. Emphasizing the significance of forward-looking indicators over lagging ones like GDP and NFP, I maintain my USD forecast profile, predicting the dollar to hold steady around current levels before experiencing more pronounced weakening in the second half of the year as the Fed cutting cycle takes effect. However, the prospect of a Trump victory in the upcoming US election may impose limits on the extent of dollar selling.

USD to Keep Pushing Lower as US Elections Come Across

Mar 11 2024

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