US Dollar Fundamental Forecast: Neutral

• US Dollar continues to slowly slide alongside Treasury rates.
• US corporate & capital gains tax hikes may cool bond markets.
• All eyes on Federal Reserve, GDP data, and busy earnings week.

The US Dollar continued to cautiously slide against its major counterparts this past week, extending what has been a pullback since the end of March. Weakness in the Greenback continued to track a combination of falling longer-term Treasury rates and fading December 2022 Federal Reserve rate hike expectations – see chart below. The week ahead could remain an uncertain one for the currency.

A key catalyst driving USD lower has been persistently dovish commentary from the Fed and Chair Jerome Powell. The central bank has been both downplaying inflation threats and keeping the door open to maintaining a longer-term accommodative stance. That is likely why recent higher-than-expected CPI and retail sales data did little to inspire a repricing of monetary policy expectations.

Data often struggles to move markets if it means that a response from monetary or fiscal policy could be lacking. On the fiscal side, risk aversion made its way into financial markets last week as US President Joe Biden announced a near-doubling of the long-term capital gains tax for those making over US$1 million. More details are anticipated this week as a part of the ‘American Families Plan.'

The president is also expected to deliver on corporate tax hikes, reversing parts of the Trump administration’s Tax Cuts and Jobs Act of 2017. This could in turn help put the brakes on rising inflation expectations, taking pressure off the Fed to normalize monetary policy. For Treasury yields, this could spell further declines ahead, acting as a cushion for stock markets and also placing the US Dollar at risk.

All eyes now turn to the central bank for its April meeting on Wednesday. Chair Jerome Powell may be asked about how fiscal policy could impact the outlook. Despite certain proposed tax hikes, the Biden administration is still anticipated to attempt passing a US$2 trillion infrastructure bill. First-quarter GDP data is also due on Friday, and a larger-than-expected rise may rekindle reflation speculation.

Earnings season also is still in play, with a very busy week ahead. Despite disappointing data from Netflix (NFLX) last week, overall reporting has been rosy. The focus is on Tesla (TSLA), Apple (AAPL), Facebook (FB), and Alphabet (GOOGL), given the strong performance in information technology stocks since last year’s COVID-19-induced selloff. Boeing (BA) will also report for a gauge of value-oriented stocks.

US Dollar Versus Treasury Yields and December 2022 Fed Rate Move Bets

Chart Created in TradingView