USD’o’meter: Is King USD about to reverse?
In this piece, we will try to assess the USD outlook in a structured way by looking at:
1) Relative rates
2) Relative inflation
3) Relative Growth
4) Relative energy
We combine the four filters in an aggregate probability-based model and find that the USD is still likely to increase in value for the next few months.
Let’s have a look at the details.
Real rates have moved slightly in favor of the EUR since the last FOMC meeting but not to the same extent as in e.g. JPY versus USD.
If anything, EUR/USD has front-runned/extrapolated the recent USD real rates weakness, which could be wrongfooted if we are right on the strong seasonality in US key figures until year-end. If they accept a Fed-style FCI-based reaction function in Europe, the ECB has (much) more dovish work to do in 2024 compared to the Fed.
Relative rates bottom-line:
EURUSD trades on the high side of fair values
Chart 1: Real rates versus EUR/USD
The soft inflation report from the US led to a substantial sell-off in the USD alongside weaker real rates, but is the tide turning for the USD? Our models are not convinced yet.