Kit Juckes, Chief Global FX Strategist at Société Générale, analyzes USD outlook.
Are markets going to distinguish between good and bad rate increases?
DXY-weighted 1-year rates against the Dollar Index suggest, if anything, that the Dollar is reasonably priced after correcting May’s rally. If it goes on tracking short-term rates, and they trade in line with our economists’ forecasts, the Dollar is going to weaken, slowly.
But increasingly not all rate hikes will be equal. The UK’s the obvious example, with the notion of 6% rates bringing out legions of homeowners in a cold sweat. I can’t see Sterling riding much further on the coattails of the MPC. But the same is true to some extent of the Eurozone, where rate hikes will only be properly Euro-supportive if we start to see an improvement in the outlook for the Eurozone economy.
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