US Dollar: Fed tightening risks keep outlook bullish – OCBC

OCBC’s Sim Moh Siong and Christopher Wong highlight renewed Dollar support from higher Oil prices, rising US yields and resilient US labour data as markets reassess Federal Reserve tightening risks. While softer June inflation allows the Fed to stay patient, They argue continued US economic resilience should eventually refocus tightening concerns, keeping the USD moderately bullish over the next one to two quarters.

USD buoyed by yields and resilience

"Global yields moved higher overnight and the USD strengthened, supported by firmer oil prices as optimism over a reopening of the Strait of Hormuz faded. USDJPY also edged back towards 160, keeping intervention risks firmly on the radar."

"The standout move across asset markets was the sharper rise in US yields relative to Europe. This was likely reinforced by an FT report suggesting Fed Chair Warsh would be prepared to support a rate hike at the September meeting if upcoming inflation data remains elevated."

"US labour market data also surprised on the firm side. Initial jobless claims rose just 1k to 199k, beating the 205k consensus and remaining below 200k for a third straight week. The earlier decline in claims increasingly looks less like a seasonal distortion and more like evidence of underlying labour market resilience ahead of today's payrolls report."

"Softening inflation in June has given the Fed scope to remain patient and assess incoming data before adjusting policy. At the same time, growing debate over whether the Fed's reaction function has shifted has tempered USD upside momentum. However, continued US economic resilience should eventually bring Fed tightening risks back into focus, underpinning our moderately bullish USD outlook over the next one to two quarters."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)