Fed Data Dependence Erodes USD Upside Momentum
The US Dollar's upside momentum has been eroded due to softer US inflation and debate over the Fed's reaction function, according to OCBC's Christopher Wong and Sim Moh Siong. The Federal Reserve remains data-dependent, giving policymakers room to wait for further evidence before adjusting policy.
Encouraging inflation readings in June have provided a buffer for the Fed to wait and see how things develop. However, growing debate over whether the Fed's reaction function has shifted has contributed to a loss of USD upside momentum.
The market is positioned for lower oil prices, lower real rates, and a softer US Dollar. Gold is leading this trade, but resilient US data could ultimately revive Fed tightening concerns and lend support to the USD.
The upcoming US employment report on Friday will be critical in shaping the Fed's next move. Continued US economic resilience should eventually bring Fed tightening risks back into focus, supporting a moderately bullish USD view over the next one to two quarters.