Dollar weakness this week is more attributable to improved growth prospects and yields on local non-US assets than to a breakdown in Fed policy expectations. In this regard, the dollar correction may be longer than expected as non-US yields driver apparently comes into the spotlight. Nevertheless, it is still premature to say that the dollar has topped out in medium-term.
This week, the dollar fell by 2.0-2.5% from its November highs. The reassessment of the Fed's chances of tightening, which we saw earlier, is now being pulled back, due to some easing of inflation pressures. In particular, yesterday's PPI report showed the first slowdown in prices in many months - the headline reading ebbed towards 9.7% against the expected 9.8%:
However, in the dollar pullback story, the story of an improving outlook outside the US is now more plausible than a downside reassessment of the US outlook and the pace of Fed tightening. It is worth remembering that the IMF predicts US GDP growth of 3.3% above potential, and if inflation remains strong, it will primarily be in the US economy.
But the effects of growth in the US are being transmitted to the external economy, and this could be a problem for the dollar. The US current account deficit continues to grow, for example China reported that the country's trade surplus with the US has reached $100 billion. Now it seems that the growth rates of other major economies are being reassessed, and investors are still inclined to look for yields outside the US.
Today, a negative surprise in retail sales is possible, as sales of one of the important components of consumption, cars, have slowed down due to high prices. The dollar index can break through the local support level (94.50) and test the levels below, where the support necessary for a reversal is likely to form. Closer to the FOMC meeting on January 26, the rise in the dollar is likely to resume.
Yesterday in EURUSD we saw a breakout of the range that lasted for about a month (1.1130-1.1380), which probably cheered up the buyers and will allow the pair to grow a little more. The main resistance is concentrated at the level of 1.15-1.1550:
Nevertheless, in the medium term, the target for EURUSD remains the level of 1.08-1.09, since with the clarification of the Fed's tightening plan, US yields are likely to creep up further, markets will especially closely monitor the pace of asset sales from the Fed's balance sheet, since the impact of this process on bond yields cannot be overestimated.
The UK released data on GDP, industrial production and services. The data turned out to be better than expected, the country was even able to reduce the trade deficit. The probability of a rate hike by the Bank of England is now 80% and its further increase is likely to support the GBPUSD before the meeting in early February. The resistance level for the pair is the level 1.3850.