Synopsis:

ANZ identifies stretched positioning as the primary short-term obstacle for further USD strength. However, the USD is expected to resume its rally in February, supported by the implementation of tariffs, robust US economic momentum, and the Fed’s cautious easing stance.

Key Points:

1. Positioning Constraints Short-Term:

   • The USD's inability to advance post-Trump's inauguration is attributed to stretched CFTC positioning, especially in EUR, CAD, and NZD.
   • Positioning adjustments in the week ahead are likely to moderate USD gains further.

2. Medium-to-Long-Term Support for USD:

   • Tariffs: Historical parallels from 2018 suggest that tariff implementations can negatively impact global growth while boosting the USD.
   • Economic Growth Differential: Stronger US economic momentum relative to the rest of the world continues to be a key driver of USD strength.
   • Fed Policy: The Fed’s cautious approach to further easing amid US economic resilience and sticky inflation supports a firmer USD trajectory.

3. Upcoming Catalysts:

   • PMI data on 24 January is expected to confirm the US’s economic advantage, reinforcing USD strength.
   • The proper implementation of tariffs in early February is likely to trigger the next leg of the USD rally.

Conclusion:

While the USD faces near-term headwinds due to positioning adjustments, its medium-to-long-term outlook remains bullish. ANZ expects the DXY to stay supported above 107 and resume its rally in February as tariffs are implemented and growth differentials persist.