Euro-Dollar Rally "Run its Course": BCA
- Written by: Gary Howes
Image: Federal Reserve, Pound Sterling Live.
Analysts at BCA Research think the dollar selloff is looking a bit old in the tooth.
The dollar's ability to fall will determine the euro's ability to rise, confirming the Greenback's centrality to directionality in the current market regime.
And on this note, an updated analysis from BCA Research - the independent research and strategy provider - says further USD downside could be difficult to realise as certain drivers are saturation point.
"We continue to recommend a tactical long DXY, as technicals and fundamentals remain stretched. The USD has been resilient despite political headlines, and with the Fed’s cutting cycle well anticipated, the dollar has room to rise," says a strategy note dated September 23.
Euro-Dollar rose to 1.19 ahead of last week's Federal Reserve decision, but fell in the wake of the decision and the realisation that there was little road left to chase further rate cut bets.
The pair is down to 1.1780 at the time of writing, and "EUR/USD is likely to consolidate as the recent USD selloff appears to have run its course," says BCA.
With EUR/USD projected to reach 1.20 by a consensus of analysts, the findings by BCA suggest scope for disappointment.
"EUR/USD has rejected new highs. European equities have also failed to break higher since Liberation Day. With European economic surprises losing momentum relative to the US, tactical outperformance of US over European equities will persist," says the BCA analysis.
Image courtesy of BCA Research.
Underpinning potential dollar resilience at this juncture is the idea that we have reached the 'high tide' for Federal Reserve rate cut expectations, a theory given credence by comments made by various members of the Federal Reserve Open Market Committee (FOMC).
They are tasked with setting the Fed Funds rate, and Monday's line-up of speakers erred to the cautious side, arguing there was no pressing need to lower interest rates. more hawkish end of the spectrum anyway and the comments broadly reflected that.
Technicals still look for EUR/USD upside.
Beth Hammack of the Cleveland Federal Reserve said, "it worries me that if we remove this restriction from the economy, things could start overheating again".
Raphael Bostic of the Atlanta Fed saw "little reason to cut rates further" as he is not expecting inflation to return to 2% until 2028. "I am concerned about the inflation that has been too high for a long time," he said in an interview with the Wall Street Journal. "And so I today would not be moving or in favour of it, but we’ll see what happens."
Alberto Musalem, of the St Louis Fed saw "limited room" towards further cuts required the labour market worsen further.
Stephan Miran, the recent political appointment to the Fed, unsurprisingly said policy was very restrictive, and saw the need for a full 2 percentage points worth of cuts to bring policy to where it needed to be.
The discourse is clearly one of disagreement, which means that although further cuts are likely, they will be challenged and that the dollar has passed maximum dovish repricing.
