USD: Further evidence of strengthening US cyclical momentum – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained at stronger levels in the Asian trading session supported by building expectations that the Fed will speed up the pace of monetary tightening in the coming years.

Key Quotes

“US dollar strength accelerated yesterday after EUR/USD broke below key support from the cyclical low at 1.0458 from March 2015. We continue to believe that there is scope for the US dollar to strengthen further during the first half of next year although acknowledge that the hurdle for further upside on the back of Fed policy will prove more challenging given that the market is already discounting a marked step up in the pace of tightening in the coming years. It has increased the risk of disappointment if the Fed fails to meet those raised expectations, although we judge that the risk of disappointment is lower than at the end of last year.”

“The Fed’s more hawkish policy tone reflects in part the strengthening cyclical momentum of the US economy. Yesterday’s economic data releases on the whole provided further evidence that the US is expanding more solidly. The Empire manufacturing and Philly Fed surveys both surprised significantly to the upside in December, and the NAHB housing market index surged to its highest level since July 2005. It appears that fortune has shined on President elect Donald Trump as he is inheriting a strengthening economy which is close to full employment. It is why the market is so sensitive to the likelihood that fiscal policy is set to be loosened significantly which could prompt the economy to overheat in the coming years.”