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- The USD should start to correct lower – TDS
The USD should start to correct lower – TDS
The Fed's tone around financial conditions has dinged the USD. Economists at TD Securities analyze Greenback’s outlook.
If the data starts to soften, then the USD should follow it lower
The Fed has done little to give the USD further support to work off the recent rally. Instead, it seems the USD is lagging the move in rates, especially as both the 2y and 10y are moving lower. As a result, the USD should start to correct lower given stretched positioning and short-term valuations.
The key takeaway is that the Fed is happy to sit on the sidelines, waiting to see the impact of the old and new shocks play out. The Fed will remain data dependent but the focus on financial conditions means that the bar for another hike is higher. If the data starts to soften as we expect, then the USD should follow it lower.
The first big test is Friday's payrolls report, where again the pain trade is a weaker USD on a consensus or weaker number. Keep in mind, though, that even with a good number, the Fed will see tighter financial conditions as doing more work for them.
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