US Dollar Momentum Weakened by Soft Inflation and Debate Over Fed Reaction
The US Dollar's upside momentum has been weakened due to softer US inflation and debate over the Federal Reserve's reaction function.
According to OCBC, a financial institution, the Fed remains data-dependent, which means policy decisions are based on current economic data. Recent inflation readings have given policymakers room to wait for further evidence before adjusting policy.
The market is positioning itself for lower oil prices, lower real rates, and a softer US Dollar. Gold is leading this trade. However, resilient US data could revive Fed tightening concerns and lend support to the US Dollar.
The upcoming US payrolls report on Friday will be critical in determining the direction of monetary policy. Continued US economic resilience should eventually bring back Fed tightening risks and support a moderately bullish US Dollar outlook over the next one to two quarters.