US Dollar (USD) takes a breather after closing-in on its August high. We’re still flying blind amid the ongoing US government shutdown, with key economic data releases on hold. As such, USD gains largely reflect external headwinds (France’s political crisis, Japan’s ruling LDP leadership election results) rather than a more favorable US fundamental backdrop. That suggests USD is prone to sharp pullback as soon as global conditions normalize, BBH FX analysts report.

Dollar faces pullback risk

"The October University of Michigan preliminary consumer sentiment report is due today (3:00pm London, 10:00am New York). Headline is expected at 54.0 vs. 55.1 in September, well below the long run average at 84.4. One-year and 5 to 10 years inflation expectations are expected to print for a second consecutive month at 4.7% and 3.7%, respectively."

"We are sticking to our view that the fundamental USD trend is intact. The risk is the Fed turns more dovish by the December 9-10 FOMC meeting because restrictive monetary policy can worsen the employment backdrop and upside risks to inflation are not materializing."

"Two risk scenarios could keep the Fed anchored to its patient easing guidance: US inflation quickens, or the economy enters a Goldilocks phase. The first scenario is dollar-negative, implying higher likelihood of stagflation. The second scenario is dollar positive. We see the first risk scenario as more likely."