US Dollar: Upside risks persist with strong demand – BBH

Brown Brothers Harriman’s Elias Haddad notes that a modest pullback in energy prices has eased the global bond sell-off and slowed the recent Dollar rally. However, he stresses that US growth outperformance and strong foreign appetite for US securities keep USD risks skewed to the upside. Upcoming US CPI and the University of Michigan survey will shape expectations for the October FOMC decision.

US growth and data underpin Dollar

"The modest pullback in energy prices eased the global bond sell-off and took some steam out of the USD rally. Nonetheless, US growth outperformance and strong foreign appetite for US securities keep USD risks skewed to the upside."

"Yesterday, Fed Governor Christopher Waller made the case for keeping the Summary of Economic Projection (SEP) ahead of the task force report expected by year-end. Waller noted the SEP give markets a sense of direction without locking the Fed into a preset path."

"Waller added he favors “additional hikes” if the economic data continue to come in as expected, but not necessarily “at consecutive meetings.” That leaves room for an October pause. Next week’s US September CPI report will help settle the October 28 FOMC hike or hold debate. Fed funds futures price in 20% probability of a back-to-back hike."

"The October University of Michigan consumer survey is on deck. The survey should continue to show that longer term inflation expectations remain anchored."