USD Firm in the Near Term but Medium-Term Bearish – Unicredit
USD Firm in the Near Term but Medium-Term Bearish – Unicredit
Research Team at Unicredit, suggests that as the market digests the
hawkish FOMC shift, the USD is likely to remain firm; but the
re-adjustment of expectations towards a more normal tightening cycle is
not enough to revive the “divergence trade”.
Key Quotes
“The hawkish FOMC minutes were swiftly reflected in market expectations
by pushing the US rate strip higher and lent further support to the
recent rebound in the US dollar: the TW USD index is now nearly 2.8%
higher MTD. As the market digests this hawkish shift, we expect the USD
to remain firm in the near term. Having said that, the latest price
action has not altered our medium-term bearish view on the USD: first, a
durable revival of the “divergence trade” requires a far more
aggressive FOMC, rather than the re-adjustment of market expectations
towards a more normal tightening cycle; second, there is no empirical
evidence corroborating USD strength during a Fed rate-hike cycle; and
lastly, even after the recent pullback, the USD remains on a bearish
trend, and is 4.5% weaker YTD.
This is why we do not view the EUR-USD retreat back to 1.12 as the basis
for a trend reversal. We also think that firmer preliminary EMU PMIs
for May, as well as higher ZEW and IFO surveys in Germany this week,
would limit any short-term downside potential.”
