US Dollar Projected Higher Near-Term by Citi

The US Dollar is looking to retake lost ground as we move through the early stages of the second quarter of 2017.

The first quarter was a disappointment for those betting on a stronger Dollar with the so-called Trump Trade reversing as investors opt to take a back-seat until Trump delivers on those tax cuts and spending increases he promised.

A look at the Dollar’s performance so far in 2017 shows the currency is down against all its G10 competitors and is only up against the Norwegian Krone.

However, there are signs that the Dollar has bottomed and could be about to perk up.

The Dollar gained in the first week of April after US Federal Reserve Vice Chair Dudley suggested that the Fed would continue to normalise rates when it started to reduce its balance sheet.

US yields rallied some 10bps from the intraday low Friday (2Y and 10Y), driving key spreads wider again in the USD’s favour.

“The USD has also perhaps benefitted from the apparently successful meeting between presidents Trump and Xi at the weekend, with President Trump’s agreement to a return visit suggesting a positive, rather than adversarial, political dynamic,” notes analyst Shaun Osborne at Scotiabank in Toronto.

US Dollar Might Strengthen in the Short-Term

As mentioned above, it would appear markets are continuing to bet the US Fed will continue to normalise interest rates and in doing so create demand for the Dollar.

While job growth slowed down significantly in March, mainly driven by US snowstorms, ahead of the FOMC policy decision in June the negative impacts of weather may fade.

“Falling unemployment rate reflects full employment level recognised by the Fed has been reached. Thus, we continue to expect the Fed to hike rates in Jun. USD may strengthen in the short term,” say Citibank in a note to clients.

Analysts at the world's largest dealer of foreign exchange believe the Fed may initially reduce the balance sheet by $10 billion per month with $5 billion in government bonds and $5 billion in MBS. The amount may increase to $30 billion later.

“The USD may strengthen in the short-term while it may range trade in the longer term,” say Citi.

BMO: Sell GBP/USD Strength

The British Pound finds itself well within recent ranges against the US Dollar at the start of the new week at 1.2404.

The UK currency has recaptured some lost ground following Friday’s notable losses against the US Dollar but the near-term outlook remains tepid as per our most recent studies.

The inability of Sterling to strike fresh highs against the Dollar has left strategists at BMO Capital Markets anticipating a trading opportunity.

“In view rising geopolitical risk and Brexit uncertainties, we expect limited upside potential in GBPUSD this week,” says analyst Stephen Gallo in a note dated April 10.

Gallo argues that due to Brexit uncertainty, GBPUSD has traded without any clear fundamental drivers so far this year.

“However, following last week’s broad underperformance of the GBP, there are tentative signs that the currency is developing a positive relationship with risk appetite,” says Gallo. “In fact, we still see downside risks in the pair on a 1-3M basis given that Brexit negotiations will probably continue their recent rocky nature until at least July.”

The analyst expects upcoming data releases to weigh on the Pound with annual core CPI inflation data (due Tuesday) expected to decelerate by a tenth to 1.9%.

“A bigger-than-expected decline would initially send the GBP lower, but it would also come as a relief for real household incomes, which is GBP-supportive,” says Gallo.

However, for the BMO analyst the bigger shock would be a material deterioration in labour market conditions on Wednesday, and he expects the main impetus for the GBP to come from the result on average weekly earnings (i.e. wage growth).

As such, the Pound is a sell on rallies:

“For the time being we would look to sell GBPUSD strength into the 1.2550 area.

“Support is at 1.2200, but we think it would take a string of very weak UK data in combination with a big flare-up in geopolitical tensions for that support level to break this week.”