US Dollar: Structural support holds with high-for-longer rates – MUFG

MUFG’s Lloyd Chan notes that strong United States (US macro data continue to support a high-for-longer US rates environment, with Personal Consumption Expenditures (PCE) Price Index inflation and Gross Domestic Product (GDP) both firm. Despite slightly lower US yields and a modestly softer US Dollar Index (DXY), the Dollar’s structural support remains intact. Fed funds futures still price one rate hike around October, reinforcing cautious Fed easing expectations.

Dollar stays supported on US data

"US macro data continues to reinforce a “high-for-longer” US rates environment. US PCE inflation rose to 4.1%yoy in May (from 3.8%yoy in April), with core PCE at 3.4%yoy (from 3.3%), both in line with expectations."

"Sequentially, headline and core PCE prints remained firm at 0.4%mom and 0.3%mom, respectively. At the same time, growth indicators point to continued resilience in the US economy, with Q1 GDP revised higher to 2.1%, from 1.6% previously, personal income and spending both rising 0.7%mom in May, and initial jobless claims easing to 215k."

"Together, the data mix suggests a resilient growth backdrop alongside sticky inflation, likely reinforcing the Fed’s cautious stance on easing. Market pricing for the fed funds rate was little changed, with Fed funds futures still pricing one Fed rate hike around October."

"That said, US yields edged slightly lower, with the 2-year at 4.12% and the 10-year at 4.39%, while the DXY softened modestly. Nonetheless, the underlying structural support for the dollar remains intact, despite a somewhat softer DXY yesterday."

"More broadly, the combination of strong US data and delayed Fed easing continues to underpin the dollar through favourable rate differentials."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)