In this article, Monex1 reviews US Dollar currency outlook of both short-term 1-3 months and mid-term of 6-12 months.

Short-term outlook – Narrative shift? Yes or no!
Undeniably, there was a noticeable shift for the USD in early November. Presently, there’s an increased discussion about a change in narrative — the Treasury’s quarterly refinancing announcement on November 1 alleviated concerns about a substantial increase in long-term bond issuance. The FOMC statement and subsequent press conference on that very day recognized the influence of the significant surge in long-term yields on the tightening of financial conditions.

Up to this point, the movement has been constrained. The DXY experienced a rapid 2% adjustment from the high on November 1 to the low on November 6 but has encountered difficulty in maintaining momentum. Presently, both stocks and bonds have paused, diminishing the cross-asset signal to sell USD (the concurrent rise in both bond and equity markets being the strongest factor driving the USD downward).

The significance of October’s CPI is resembling that of last year. Will it affirm the market’s anticipation of continuous disinflation or raise doubts about the additional cut currently anticipated for 2024?

We remain among those anticipating a USD rebound. While the simultaneous rally in bonds and equities may present a substantial short-term challenge for the USD, if this trend endures, it could also reverse much of the tightening that the Fed believed was effective.

Altering our perspective on the USD is challenging without clear confirmation of a genuine slowdown in US data. Presently, we haven’t observed adequate evidence to make that assertion, acknowledging that forecasts of a slowdown in the USD have persisted for over a year among bearish viewpoints. We’ve maintained our forecasts unchanged for the 1-3 month period. The primary risk remains associated with market positioning.

Mid-term outlook
There’s little uncertainty that shorting USD is likely to emerge as one of the most popular thematic trades in January 2024, continuing the trend of the past three years. Although US data showed signs of slowing down, they are already rebounding and when compared relatively, other global regions still appear less favorable. As mentioned earlier, the simultaneous rise in both bond and equity markets has lost momentum, making it challenging to rely on it as a catalyst for a decline in the USD. While the US deficits might eventually impact the currency, we believe it’s premature to consider this scenario as long as the private sector maintains a surplus.