The USD Is at a Crossroads

The USD is currently influenced by two conflicting forces, each driving its path in different directions. On the positive side, the anticipation of a second presidential term for Donald Trump could lead to increased fiscal stimulus and new tariffs on US imports. This, in turn, could elevate US inflation, thereby boosting rates and yields. Conversely, on the negative side, market expectations for Federal Reserve (Fed) rate cuts have been growing due to recent weaker-than-expected US inflation and economic activity data. Presently, the latter force appears to dominate, reflecting its immediate impact with the first Fed rate cut anticipated in the upcoming months.

USA CPI 

The anticipation of Fed rate cuts is becoming more prominent, with the first cut expected soon. This has led to a defensive stance on the USD in the near term. However, many of these Fed-related negatives are already factored into the USD's price, as indicated by the high probability (approximately 80%) that investors attach to three rate cuts this year. This outlook appears overly pessimistic, and upcoming US economic data and Fed communications could challenge this perspective.

FEDWatch

In the FX market, many negative factors are already priced into the USD, as evidenced by the reduction in USD long positions by investors. This indicates that only a significant deviation from expected data would have a lasting impact on the currency. The current sentiment suggests that the USD might be more resilient to negative data than previously thought, given the already adjusted market positions.

In summary, the USD is at a crossroads, influenced by both potential fiscal policies and imminent Fed rate cuts. While the expectation of rate cuts currently prevails, the market may have already priced in much of the negative outlook. Therefore, upcoming economic data and Fed communications will be crucial in determining the USD's future trajectory.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.

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