ING outlines two primary factors supporting a bullish outlook on the USD: the Federal Reserve's recent policy direction and emerging stress within regional banks in the United States.
Fed's Policy and Rate Cut Expectations:
- The Federal Reserve's recent meeting underscored a cautious approach towards rate cuts, emphasizing the need for more data to gauge inflation and economic balance. This stance has led to a slight uptick in short-term US rates, providing support for the USD. Upcoming data releases, including the annual CPI benchmark revisions and the January CPI report, are now marked as significant events for both the Fed and investors, potentially influencing future policy decisions.
Stress in US Regional Banks:
- Concerns around US regional banks, highlighted by New York Community Bancorp's (NYCB) sharp share price decline due to poor earnings and substantial loan loss provisions, are putting the sector under the spotlight. The focus on commercial real estate as a potential weak point raises questions about the sector's stability. This development has led to a widening of the 3-month EUR/USD cross-currency basis swap, indicating increased costs for banks to secure dollar funding. Such conditions typically favor USD strength, although the Federal Reserve's actions to mitigate funding pressures could eventually stabilize the situation.
The combination of the Federal Reserve's cautious stance on rate cuts and emerging concerns around US regional banks presents a compelling case for a bullish USD outlook. While the Fed's data-dependent approach may delay immediate policy easing, stress within the banking sector could drive short-term USD strength. However, the trajectory of these developments, especially in the banking sector, warrants close monitoring due to potential impacts on broader financial conditions and the Fed's response.