MUFG Research discusses the USD outlook and flags a scope for further upside for USD Index 'DXY' in the near-term.
"While both the NFP and ISM data remain substantially below the 2018 levels, the data are not proving as bad as feared. Indeed the last time the ISM Non-manufacturing survey was averaging around 54-55 was in 2016 when the US economy was expanding by 1.6% - while this is still subdued growth it will certainly put recession fears to rest for now. This view is reflected in rates and FX now – the 10-year US Treasury is yielding around 1.84% and is looking at testing mid-September 1.90% level. And looking at rates market pricing, the odds of another 25bps Fed rate cut is not fully priced until January 2021," MUFG notes.
"Overall the rates environment will likely prove supportive for the US dollar and breaking above the 98.000 DXY level is feasible. However, as implied above, this view holds for now but more robust evidence of recovery abroad, or in the euro-zone specifically will likely see that rates/FX correlation break down," MUFG adds.