Investing.com – Rates have found their footing after a few weeks of heavy losses, but just as bears sharpen their claws for another swing, some are pointing to favorable fundamentals, including the pricing of rate cuts, that will boost the dollar will cause battle.
The dollar has “clearly suffered since early July,” Macquarie said, as traders shifted expectations to Fed rate cuts starting in the third quarter rather than the fourth quarter, but “we doubt a weak USD globally will continue until the end of 2024. “
While expectations for three Fed rate cuts (in September, November and December) have driven most of the pressure, Macquarie adds, the rate cuts are “now fully priced into the OIS rate,” suggesting limited pain for the dollar.
The dollar is also likely to benefit from the demise of its currency rivals, including the euro, at a time when the eurozone has seen much softer inflation and growth that will force the ECB to resume interest rate cuts in September and keep the euro in check.
“It is likely that the ECB will still have eased by the end of the year by no less than the Fed did in 2024, and continue into 2025, allowing a convergence to 1.05 by mid-2025,” he said. Macquarie.
Fundamentals, meanwhile, also bode well for the dollar and are expected to show declining inflation expectations reaching their limits in late 2024 in the coming weeks, limiting expectations for the Fed to pursue an aggressive easing cycle.
The political front could also prove to be a source of strength for the dollar, Macquarie argues, with markets soon realizing that a “Trump policy agenda will be associated with inflation, not disinflation.”
In the wake of Trump’s assassination attempt and the ongoing power struggle among Democrats, the “political backdrop has changed enough over the past two weeks … to provide a reasonably derivative projection of Trump’s victory in November,” Macquarie said.
As the November election approaches, Macquarie expects traders will increasingly focus on Trump’s policy implications, including limited immigration, tariffs, de-globalization and more expansionary US fiscal policy that is likely to support inflation.
“These are all things that could help the USD reaffirm its fundamental strengths,” Macquarie added.
