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Jan 21 - 06:55 PM

SocGen: Strategic and Tactical Outlook for the USD

By eFXdata  —  Jan 21 - 03:00 PM

Synopsis:

SocGen expects the USD to maintain its strength but not rise much further. The dollar's resilience is underpinned by trade policy risks, persistent inflation pressures, and US treasury yield support, creating a volatile and challenging environment for global FX markets.

Key Points:

  • Strategic USD Outlook:

    • The USD is expected to "drift at a high level," staying strong without significant further appreciation.
    • Tariff threats and policy uncertainties create inflationary risks in the US, with 4.1% unemployment and potential tariff impacts likely exacerbating inflation pressures.
    • Treasury yields are expected to remain supportive of the USD due to elevated core inflation and energy policy adjustments like expanded oil drilling and natural gas exports.
  • Tactical Observations:

    • MXN and CAD: Suffering the most immediate impact from impending tariffs set for early next month, though still marginally stronger vs. USD than last week.
    • AUD and NZD: Temporarily reprieved while focus shifts away from China, but risks could return as trade policies evolve.
    • European Currencies: Moderate strength persists, with CZK and PLN outperforming, while NOK could weaken due to increased gas supply and suppressed crude oil prices. SEK could be favored over NOK in short NOK/SEK trades.
    • GBP: Out of the spotlight for now, providing some stability.
    • JPY: Awaiting a BoJ rate hike of 25bp to 0.5% on Friday, with treasury yields complicating the BoJ’s policy normalization efforts.
  • Broader Market Context:

    • The path for significantly lower US Treasury yields is unclear, adding to global FX market challenges.
    • Day-to-day USD trading conditions remain volatile, driven by tariff developments, inflation risks, and geopolitical shifts.

Conclusion:

SocGen maintains a cautiously strong view on the USD, expecting it to stay elevated in a volatile environment. Tactical plays focus on relative strength in European currencies like CZK and PLN, potential weakness in NOK, and ongoing pressure on CAD and MXN. Global FX markets face a challenging period of high volatility and policy-driven moves.

Source:
Société Générale Research/Market Commentary

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