US Dollar Relief Rally Unlikely to Sustain

The US Dollar (USD) has recovered some of its recent losses as concerns over the Federal Reserve's credibility ease, but a rebound is unlikely to be sustained. Elias Haddad from Brown Brothers Harriman notes that the USD's relief rallies are likely to remain shallow.

Balanced labor market conditions and wage growth consistent with the Fed's 2% inflation target support the disinflation outlook. The upcoming Q2 non-farm productivity data could help shape near-term rate expectations, but the US labor market is in balance and wage growth is on track.

The drag to USD from the Fed's credibility gap has eased, according to Haddad, as US 5y5y inflation swaps have retraced much of their recent rise. However, the renewed pick-up in services price pressure suggests upside inflation risks have yet to fully recede, raising the cost of waiting to raise rates for the Fed.