Dollar could still extend further weaker due to momentum and positioning in a low-volume market – MUFG

The US Dollar Index (DXY) hit a new low not seen since July on Thursday. Economists at MUFG Bank analyze Greenback’s outlook ahead of US PCE inflation data.

Further Dollar selling from here could prove more difficult from a fundamental perspective

A consensus increase in the MoM core PCE inflation rate today (0.2%) is likely to mean the 6mth annualised gain will fall to the Fed’s 2% target level and will be another powerful indication that the inflation problem and the view that underlying inflation pressures were ‘sticky’ is simply no longer the case.

A benign print today that confirms for example that the 6mth annualised core PCE rate has hit the 2.0% target will certainly reinforce the prospect of the Fed cutting rates as early as March. However, that is now close to fully priced with 23/24 bps priced and hence it is hard to envisage a big rates move today.

While the Dollar could still extend further weaker due to momentum and positioning in a low-volume market, from a fundamental perspective further Dollar selling from here could prove more difficult.