The dollar continued strengthening in October on higher Treasury yields and further upside surprises in US macro data.
Where next for the US dollar?
Our base case remains that the dollar will ultimately unwind the overvaluation that built up in 2022 over the medium term. That said, the ongoing environment of “U.S. exceptionalism” – evident in rate differentials moving in the USD’s favor as U.S. growth data remains resilient (even as inflation falls) while the European economy shows clear signs of losing steam, the recovery in China remains lukewarm, and the Bank of Japan doesn’t seem to be in a hurry to tighten policy – create a high hurdle for a weaker USD in the near-term. We are neutral on the dollar in the short-term until we see clearer signs of US- growth and rate differentials re-converging with the rest of the world. And would hedge a sharper slowdown in global growth via shorts in vulnerable, high beta G10 (e.g., GBP, EUR).
What we’re watching: U.S. growth momentum, ROW (Europe & China) economic surprise indices.
Our view: U.S. Dollar Index (DXY): 105 (103-107) by mid-2024
Where next for the euro?
We downgrade our outlook for EURUSD to reflect a weaker European growth backdrop and expectations for more prolonged growth and rate divergence between the U.S. and Eurozone. In addition, geopolitical tensions pose an outsized risk to the region (relative to the U.S.). Our base case now expects the pair to be rangebound at low levels in the near-term. Current fair value for EURUSD based on interest rate and growth differentials looks to be around 1.04.
We continue to pencil in some slight upside in 2024. Euro may benefit over time from global investors closing underweights to European fixed income now that negative rates are a thing of the past and we think the current degree of US cyclical outperformance should will ultimately fade. However, the path to that point will likely be choppy, especially if US growth continues to prove resilient for an extended period of time.
What we’re watching: Eurozone vs. U.S. growth momentum, fixed income flows.
Our view: EUR/USD 1.06 (1.04 - 1.08 ) by mid-2024
This is part of our monthly Global Investment Strategy (GIS) available to all our clients. It covers all the main markets and provides technical insight from our market solutions team.
*All outlook estimates represent the midpoint of our range. GDP and inflation numbers have a +/-10bps range, rates have a +/-25bps range, and all other outlooks are within the range that is provided. Estimates, forecasts and comparisons are for illustrative purposes and are as of the dates stated in the material. Please refer to “Definition of Indices and Terms” for important information. Past performance is no guarantee of future results and investors may get back less than the amount invested. It is not possible to invest directly in an index.
