On Monday, UBS strategists provided insights on the U.S. dollar's trajectory, noting the potential for a tactical bounce if the Federal Reserve opts for a modest interest rate cut on September 18.
The dollar has been trading below its 200-day moving average and toward the lower end of its range for the year, which could allow for some upward movement if the Fed reduces rates by only 25 basis points, rather than the 50 basis points some have speculated.
The strategists highlighted that the carry premium that supported the dollar in the first half of the year has been diminishing, which could weaken the currency in the longer term.
They also pointed out that the market is more open to the possibility of the Fed cutting rates by 50 basis points, a stance not mirrored by other major central banks. This discrepancy could influence the dollar's strength going forward.
According to UBS, for the dollar to regain its upward momentum, it would require an unexpected increase in U.S. inflation data. Otherwise, they believe there is a negative bias towards the dollar, exacerbated by a perception of the U.S. labor market that is less than optimistic.
The upcoming U.S. elections in November present another variable that could introduce high volatility and a potential shift in the dollar's direction. However, the current performance of Vice President Harris in polls has led markets to reduce expectations for sweeping policy changes. As a result, investors may favor economic cycles over political ones in their decision-making processes.
In other recent news, strategists from BCA have suggested that Europe might be heading towards a recession, advising investors to favor defensive assets over cyclical ones. They also recommend buying into healthcare and selling industrials, with a preference for Switzerland over the Eurozone. This comes as Citi strategists expect a long-term reversal in the yen's fortunes, contradicting the widely held belief in its structural weakness.
In the US, jobless claims have seen a dip, easing labor market concerns. The Labor Department reported a decrease in claims, contrary to economists' predictions, indicating a stable labor market. However, Richmond Federal Reserve President Thomas Barkin has hinted at a potential shift in US business employment practices, suggesting a possible increase in layoffs if economic conditions worsen.
Meanwhile, Citi FX analysts have shown a preference for a stronger US dollar, citing significant DXY support levels and initiating a position against the euro. These recent developments provide key insights into the current global economic landscape.
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