After a sharp sell-off to the downside the DXY is now moving to the upside and we expect far more strength ahead...
The market is looking for 3 rate cuts 68 bps from the Fed with the first in September ahead of the election and two more after that which looks optimistic in terms of the likely outcome of the election in November
Trump looks likely to win the election and the chances are 75%, while his closest rival is now Kamala Harris at 18%. Joe Biden's chances of winning in November are priced at just 13% and show a conviction in the markets this week that President Biden will be out of the race leaving it to Kamala
Even CNN an anti-Trump TV network sees a Trump victory as John King noted on Tuesday how Donald Trump is on course for a landslide in the November election and could get as many as 330 electoral votes (only 270 are needed to win).
If Trump wins his policies will be inflationary so will the Fed be comfortable cutting before November? They might but they must be worried about a Trump win and may hold off also with Trump in office two more cuts look unlikely.
The view of GS: “A 10% surcharge on US imports, if implemented, would modestly impact US growth and substantially weigh on Euro area growth given the sensitivity of Europe’s economy to trade policy uncertainty. Higher US tariffs would also likely lead to a stronger Dollar, and while Trump has proposed devaluing the Dollar in conjunction with raising tariffs—in the vein of the 1971 Smithsonian Agreement—we think a unified and meaningful currency agreement looks unlikely given several macro, institutional, and logistical challenges.” (GOLDMAN SACHS)
The market view of the FED is dovish but we expect more cuts from other major central banks than the market anticipates with the BoE and ECB for example easing more than the Fed. We agree with this view:
"We have been bullish on the USD throughout the year on the premise that the Fed will cut slower than other central banks and that the dollar was under-pricing the U.S. election. The dollar’s rally in recent days is arguably in part due to the market finally starting to price a higher risk premium on this event." (George Saravelos Deutsche Bank)
Other factors that could come into support the USD are a correction in stock markets which look overbought, slowing global growth with the engine of the global economy China slowing and finally geo political problems escalating in any or all of the following Ukraine, The Middle East and Taiwan
The recent pullback in the USD looks a good risk to reward buying opportunities.
Technical Analysis
We are already short and the key levels to look out for are below – If you want to see our market analysis and views on 14 pairs each day CLICK HERE
