Reality sets in

After stalling out at the back end of last week, a renewed dollar rally has been the story of recent days. Since Monday, DXY has risen by almost 2%, with the index now up by 7% since the beginning of October. Underpinning this continued resurgence are expectations for the incoming Trump administration. As reality sets in for markets, the prospect of continued US growth exceptionalism, upside inflation pressures, tighter rates, all combined with tariff risks, have offered a distinctly favourable backdrop for the dollar. Set against this, other risks have faded into the background for the time being, albeit helped by a relatively quiet data calendar. That said, as the week closes out, we now think greenback valuations are beginning to look a little toppy, leaving us to suspect the dollar rally could be starting to run out of steam.

As such, we will continue to have one eye on the dollar next week once again. But we think the focus for markets should be elsewhere, with data releases from the UK, Canada, and the eurozone topping the docket. For the first two counties on the list, CPI data is in the spotlight, with inflation rebounds looking likely. Meanwhile, in Europe, PMI readings and negotiated wages should be top of mind for traders. But barring any major surprises, this should allow markets to take a breather, after a hectic few weeks. Whether or not this is enough to finally take the wind out of the dollar’s sails though, remains to be seen.

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Author: 

Nick Rees, Senior FX Market Analyst

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