USD gains could reverse if upcoming US data backs up the case for a further pause in tightening policy – MUFG

The US Dollar rebounded on Friday and was stronger over the week as well. Economists at MUFG Bank analyze USD outlook.

USD sustained strength unlikely

Moves back and forth between strength and weakness may well persist going forward. We have arrived at a point in tightening cycles where determining how much further tightening is required is more difficult to know and hence central banks and markets will be more sensitive to incoming economic data. 

Friday was a case in point with sharp EUR depreciation following weak PMIs. But data in the US could also start to weaken and we maintain it is more likely than not that the FOMC will continue with its pause in tightening – if we are correct we see that as an influence in weakening the Dollar, assuming we do not get a dramatic deterioration in growth outside of the US. 

So US Dollar gains could reverse if upcoming economic data from the US backs up the case for the FOMC extending its pause in tightening policy further.