US Dollar: Easing Rates Pose Correction Risk – ING

The Dollar rally looks stretched. ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner say selling linked to AI spread into defensive stocks, lifting the Dollar before the strong US jobs data arrived. In their view, lower US front-end rates and the forthcoming US CPI release should cap further gains.

Dollar Rally Seen as Overextended

"We think the dollar rally requires the risk-off mood to persist this week. Otherwise, there is some moderate correction risk, as Friday’s move looked a bit too stretched relative to short-term market drivers. Still, in our view, the macro story should prevent DXY from returning to last week’s lows of 101.1."

"We expect tomorrow’s October US CPI to come in at 0.3% month-on-month for both headline (consensus 0.3%) and core (0.3%). That should help cement expectations for a December Fed hike (19bp priced in), making the swap curve more protected from other equity market shocks."

"Contagion from AI to defensive stocks in the US and worldwide allowed the dollar to rally even before the strong US jobs market report. But unless risk sentiment remains poor this week, lower front-end US rates should favour a weaker dollar, even if inflation tomorrow comes in slightly hotter than expected."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Learn more.)