Title:
Expert Analysis: USD Falls as UST Yields Drop – What to Expect Post-Fed Cut
Article:
The USD has taken a hit, following the downward trend of UST yields. While the anticipation of the first Fed rate cut may cause the USD to weaken, the aftermath of the cut could lead to varying outcomes, as observed in previous rate cut cycles. According to OCBC FX strategists Frances Cheung and Christopher Wong, the performance of the USD is contingent upon market dynamics and the growth environment once the Fed cut cycle commences.
US CPI Report in Focus
In times of major crises or global event risks like the GFC, safe-haven currencies such as JPY, CHF, and to some extent, USD, tend to outperform. However, if the Fed’s rate cut is more about policy normalization rather than recession-driven, and global growth outside the US remains stable, the USD may underperform. With a soft landing scenario as the central base case assumption, it is expected that the USD will lag behind other currencies.
In the short term, caution is advised as USD shorts appear to be crowded, and concerns about growth in the Euro-area and China linger. Any indications of weak growth or a dip in equity markets could trigger a USD short squeeze. This week’s data releases, including China’s activity data and ECB Lagarde’s press conference, may offer insights into the Euro-area’s economic health.
US CPI Report Impact
The highlight of the day is the US CPI report, scheduled for 8:30 pm SGT. The data could have a marginal impact on the USD, with Core CPI expected to remain steady at 3.2%. A lower-than-expected print may weigh on the USD, while a positive surprise could fuel another round of USD short squeeze. The USD faces two-way risks in the near term, with DXY currently at 101.51. Daily momentum shows mild bullishness, with support at 100.50 levels. A decisive break could push the USD to 99.60 support, while resistance lies at 101.70 (21 DMA) and 102.20 (23.6% fibo retracement).
Analysis:
In simple terms, the USD is experiencing a decline due to falling UST yields. The impact of the first Fed rate cut on the USD’s performance will depend on various factors, including market dynamics and global growth trends. Safe-haven currencies may outperform during crises, while a policy normalization-driven rate cut could lead to USD underperformance. In the short term, caution is advised as USD shorts are abundant, and concerns about growth in key regions persist. Keep an eye on data releases, particularly the US CPI report, as they could influence the USD’s direction in the coming days.