USD: Rate Outlook Favors Greenback; Keep Buying Dips - Credit Agricole

The USD suffered towards the end of last week, mainly on the back of a weaker PCE report. However, thin market conditions most likely exaggerated Friday’s price action. This is especially true as the Fed remains on track with tightening monetary policy by more than markets currently price in. There have been an increasing number of comments from various FOMC officials recently. Fed voter Bullard was the latest to add his view, suggesting that “the next rate hike may not be far off”, while some members have insisted two rate hikes this year is quite reasonable. While such comments have prompted a re-pricing in US rate hike expectations, it has been very modest. A 25bp rate hike is fully priced for around November with around a 50% probably of a hike for June.

Market focus is likely to remain on the USD this week given there are key data releases from the US with ADP employment report, non-farm payrolls and ISM manufacturing survey all on the calendar. The ISM survey is expected to return back into expansionary territory, while the labour market data is expected to show further improvements with a further pick up in wage growth.

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Should this be the case, it could prompt a further rise in US rate hike expectations. As such we favour buying USD dips. Against the AUD and NZD, the greenback is still at levels below pre-FOMC, while SEK and GBP have failed to hold on to their gains (see chart). There are also a number of FOMC speakers this week: Williams, Kaplan, Evans, Dudley and Mester, of which only Mester is a voter.