Synopsis:

ING offers a cautious stance on the dollar's bearish trend, despite market anticipation of Federal Reserve rate cuts in the upcoming year. The recent softer inflation report has significantly impacted market dynamics, but ING advises prudence before fully embracing a dollar bearish trend.

Key Insights:

• Fed Funds Futures Reaction: The Fed funds futures curve has shifted, now predicting easing from June and totaling 50 basis points in cuts by July. This aligns with ING's forecast of 150 basis points in Fed cuts in 2024, yet markets are currently pricing in less.

• Caution on Dollar Bear Trend: While markets have reacted substantially to the recent inflation data, ING urges caution. The core inflation rate was close to consensus, and strong US economic performance continues to support the dollar. Evidence of a US recession in 2024 remains speculative, and near-term strong US activity could reverse the dollar's recent decline.

• Dollar's Current Valuation: Post-US CPI release, the dollar has moved into undervaluation territory against most G10 currencies, a notable shift from its previous overvaluation status. This significant change prompts ING to suggest a more measured approach to dollar bearishness.

Conclusion:

While market trends indicate a shift towards a weaker dollar in response to expected Fed rate cuts, ING advises a more balanced approach. The lack of solid evidence for a US recession in 2024 and the potential for continued strong economic data in the near term may challenge the current bearish sentiment on the dollar. Investors are recommended to closely monitor upcoming US economic indicators before fully committing to a dollar bear trend.