Strong US jobs data and a higher-than-expected January CPI number have unnerved the disinflation trade in FX markets – namely, that of a benign decline in the Dollar. Economists at ING analyze Greenback’s outlook.
Benign Dollar decline to start next quarter
Federal Reserve officials accept that the disinflationary path will be a ‘bumpy’ one. However, we retain a view that inflation will remain on track towards policy targets. If that is the case, current Dollar strength may only last another month or two.
For the FX benchmark EUR/USD, that probably means that the downside is limited to the 1.0500/1.0700 area this month; recall that January and February are typically strong months for the Dollar.
We continue to expect a modest rally this summer and EUR/USD to end the year somewhere near 1.1500.
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