OCBC’s FX strategists Sim Moh Siong and Christopher Wong note the US Dollar (USD) rally has paused as global risk appetite improves, but highlight that sticky United States (US) inflation and steady labour data keep hawkish Federal Reserve (Fed) risks alive. They stress that reduced forward guidance increases data sensitivity, lifting FX volatility and supporting the Dollar, with US growth outperformance and policy divergence seen as key medium-term supports.

USD pause keeps Fed risks alive

"The USD rally paused, with the currency softer overnight as global risk appetite improved. Core PCE rose 0.3% MoM in May, in line with consensus expectations, but at 3.4% YoY remains well above the Fed’s target."

"We recently raised our USD forecasts. A stronger USD is not yet disruptive. The key risk is continued US growth outperformance versus the rest of the world, alongside policy divergence, which could keep funding costs elevated and support the USD."

"This should keep hawkish Fed risks in play, especially as price stability sits at the core of its reaction function. With reduced forward guidance, each inflation, labour and growth release will carry greater weight, likely increasing FX volatility. Jobless claims remain consistent with a stabilising labour market, pointing to decent June payroll growth."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)