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- USD rebound could extend further over the short term – MUFG
USD rebound could extend further over the short term – MUFG
The US Dollar Index (DXY) set new year-to-date highs after the shock increase in the US Consumer Price Index (CPI) in January. Economists at MUFG Bank analyze Greenback’s outlook.
Continued Dollar upside risks for now
The CPI data has done some real damage to the prospects of a rate cut by May. The Overnight Index Swaps (OIS) market now has just 10 bps of cuts priced for May. At the end of January, the market had 33 bps priced. June is now just about priced for a 25 bps cut. With two more CPI reports before 1st May, we would be surprised to see that implied probability drop notably further for now.
So OIS pricing has adjusted to what we would describe as reasonable pricing but 2-year spreads on government bond yields and swap rates have moved notably in favour of the US Dollar implying continued Dollar upside risks for now.
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