Forex. US Dollar: Negative Seasonality Starting to Show – ForexNews.PRO
The dollar decline is trying to gather some pace with December’s negative seasonality pairing up with poor US data and lingering USD overvaluation relative to short-term drivers. We could see some stabilisation today, but we retain a bearish bias on the dollar, and our EUR/USD target for year-end remains 1.180
USD: ADP Validate Rate Cut Bets
The drivers of yesterday’s USD drop are to be found in the stabilisation of risk sentiment, some soft US data and the fact that the dollar’s starting position this week was one of marked short-term overvaluation versus most of the G10. All this against a backdrop of the negative USD seasonality in December.
After yesterday’s 32k drop in ADP payrolls, a Fed cut next week looks even closer to a certainty. The OIS curve is pricing in 25bp, meaning the Fed would face a potentially sharp adverse reaction in risk assets should it decide to hold. At the same time, there is only another 15bp priced in by March, meaning that expectations are firmly on a hawkish cut in December. Our view remains that data will justify two more cuts early next year, which underpins our view that the dollar won’t make a comeback even in the seasonally favourable first quarter.
Today, expect some focus on Challenger’s job cuts and jobless claims. However, the big release of the week was yesterday’s ADP payrolls, and unless PCE inflation spikes tomorrow (PPI and CPI for September suggest not), markets are unlikely to materially review their Fed pricing before next Wednesday.
This means we could see some stabilisation in the dollar today, even though adverse seasonality and some lingering overvaluation against most G10 peers mean the risks remain predominantly on the downside.
EUR: Still Relatively Cheap
We continue to have 1.170 as our EUR/USD target for next week’s Fed meeting and 1.180 as our year-end target. As discussed above, seasonality should help, but it’s also worth noting that our short-term fair value model continues to point to around 1.1% undervaluation in the pair.
The week hasn’t led to any major progress on the Russia-Ukraine peace talks so far. The meeting between US envoys and Russian officials in Moscow has led to a cautiously constructive tone, but with little indication that we may be close to a breakthrough. We still think the euro has room to benefit should a truce deal be reached by Christmas.
