US Dollar Talking Points

The US dollar Index (DXY) pulls back from a fresh yearly high (95.27) as the U. of Michigan Confidence survey tumbles to 66.8 from 71.7 in October to mark the lowest reading since 2011. Yet indications of stronger economic activity may keep the greenback afloat as it put pressure on the Federal Reserve to implement higher interest rates sooner rather than later.

Fundamental Forecast for the US Dollar: Bullish

The recent rally in the US dollar comes on the back of the larger-than-expected uptick in the Consumer Price Index (CPI), and the update to the Retail Sales report may generate a bullish reaction in the greenback as household spending is expected to increase for the third consecutive month.

US Retail Sales are projected to rise 1.4% in October after climbing 0.7% the month prior, and a pickup in private sector consumption may fuel speculation for higher US interest rates with the Federal Open Market Committee (FOMC) on track to reduce “the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities.”

As a result, signs of sticky inflation along with evidence of stronger activity may push the FOMC to forecast a steeper path for US interest rates as the central bank is slated to update the Summary of Economic Projections (SEP) at its last meeting for 2021. And it remains to be seen if Chairman Jerome Powell and Co. will respond to the recent data prints as officials continue to brace for a transitory rise in price growth.

Source: CME

Nevertheless, the CME FedWatch Tool shows speculation for higher US rates in 2022 as Fed Fund futures highlight a greater than 60% chance for a 25 bps rate hike in June. Plans to normalize monetary policy may lift longer-dated Treasury yields throughout the remainder of the year as the FOMC pledges to “use our tools to preserve price stability.”

With that said, the US Retail Sales report may generate a bullish reaction in the dollar as the update is expected to show a pickup in household spending, and the DXY may continue to trade to fresh 2021 highs throughout the remainder of the year as the FOMC starts to scale back monetary support.