In New York morning trade, we are looking at the US dollar index nearly unchanged, hovering right around the 99 level, and this does come even with geopolitical tensions potentially cooling and it's been a big week for US economic data on the heels of the PC as well as the revised Q1 GDP figures.
The Atlanta Fed GDP now model tracking a 3.8% growth rate for Q2 and resilient.
Data now keep in mind that the greenback could potentially break out of its year-long range and add to this the swearing in of Kevin Warsh as the 7 17th Fed chair.
He inherits a tricky inflationary environment of sticky 3.8% inflation.
Well joining me on this Friday morning to weigh in on the FX market is Elias Haddad, VP, Global Head of Market Strategy at Brown Brothers Harriman.
Good morning and happy Friday to you, Elias.
Thank you so much for joining us.
So on the heels of the latest economic data, we are looking at the dollar index hovering near unchanged, and the same goes for the US currency against the majors for now.
So what do you make of what we're seeing, and would you say that the US economic exceptionalism is too strong for any geopolitical relief rally to dent the currency?
Well, good morning, Remi.
Thank you very much for having me on your show.
Um, indeed, I mean, what we've seen, uh, lately in terms of, uh, you know, market activity has been heavily influenced uh by sentiment tied to the uh Iran war, right?
Uh, but generally speaking, outside of this fog of war, I look at the US dollar and it's still within this one year range, 96 to 100.
I think this range will hold, but the risk is, at least from for over the next few months, is that we could see an overshoot of this range, really underpinned by a resilient US economic activity.
You look at the labor market, looks at least labor demand is stabilizing.
Uh, inflation pressures remain sticky.
A lot of underlying measures of inflation have, have now stalled and are moving further away from the Fed's 2% target, and as you pointed out, I mean, look at leading indicators, they're pointing to above trend real GDP.
Growth, like the Atlanta Fed wage growth tracker.
So in absolute terms, the US macro backdrop supports this latest upward shift we've seen in US rate expectations, and that is supportive of the US dollar.
And also, as you pointed out, well, there's no exceptionalism, really.
If there was any, it's with a small e, uh, but, uh, the US economy is outperforming most of its, uh, uh, its peers, right?
When you look at the, the PMI indexes, the US growth momentum, uh, is exceeding that of the eurozone.
On the UK and Japan.
And so I think in this, in this context where you've got, you know, the US, a resilient US economy, uh, in absolute term, uh, uh, and, uh, outperforming other major economies, I think that tilts the risk for a short term overshoot, uh, for, for the US.
Dollar in the near term, but I'm still bearish on the dollar over the long term from a structural perspective, you know, because of the three big reasons still, and that's not going to change anytime soon.
You've got, you know, fading confidence in US trade and security policies, uh, the lack of of fiscal, US fiscal credibility, and the ongoing politicization of the Fed.
This has not changed, and that remains a structural drag here on the US dollar.
Yes, and speaking of which, Elias, I'm looking at the countdown clock until the next Fed meeting, and we have approximately 19 days and 4 hours to go until the next Fed meeting for the central bank, and Wars was officially sworn in as Fed.
Last Friday and there's been a lot of market expectations in terms of what he will be delivering and I understand that your recent research actually warns that a war-led Fed will likely disappoint some expectations but walk us through this.
Yeah, absolutely.
I mean, the common consensus here is that Kevin Warsh is, is will lead to a dovish pivot from the Fed, and that's bearish for the US dollar, and that could lead to a steeper US yield curve.
I mean, that's, there's nothing new here that that's well digested by the market, but I argue that, you know, there's, there's, there's two big structural constraints or big, two big constraints facing Kevin Warsh that could Disappoint market expecting this double shift.
You know, the number one is that, first of all, I mean, the Fed, it's not a dictatorship, but you still need consensus from 11 other FOMC members, right?
Outside of the of the Fed chair, and right now you look at the center of gravity within the FOMC, and it's certainly shifted away from a easing bias towards more of a neutral bias and with underlying inflation.
Measures moving away from 2%.
It's going to be very hard for Kevin Warsh here to convince a majority of Fed officials to turn more dovish.
And then the second big constraint is that there's uh uh uh there's a, there's a limit to how much the uh the the Fed can shrink its balance sheet without creating a destabilizing pickup in funding stress or, or the repo market.
Um, and, and so to me, these two big constraints suggest that we could see, uh, uh, the markets being disappointed, uh, of, of, if, if you're expecting a, a dovish Fed, uh, a dovish, uh, a dovish, a dovish, uh Fed shift, uh, and that means I think the US dollar can stay resilient from a cyclical investment horizon.
Uh, but, you know, from, from, uh, beyond the, beyond the near term, um, there's still the, the, uh, the, I guess the uncertainty over, uh, the, uh, uh, the makeup of the, of the Fed board, and that, and that could shift more dovish if, uh, uh.
President Trump manages to appoint another board member to replace, for instance, Powell if he decides to resign.
So that could tilt the balance a little bit, but overall I think near term wise I think it's still an environment where we could see the US dollar trading in a resilient manner.
And finally Elias, we have about 60 seconds here.
You mentioned your expectations for the Federal Reserve, so I do want to get your take on rate differentials in New York morning trade.
We are looking at the euro, the yen, as well as the pound, and nearly unchanged on the session against the US currency.
But what is your near term range for those currency fairs?
Yeah, that's a good point.
I mean, because you look at rate expectations, they've adjusted higher across the board, right?
And that's not just the Fed that we've seen rate expectations adjusted higher, but also the ECB and Bank of England.
But unlike the Fed, the upward adjustment to the ECB's rate expectations curve, is largely justified by high inflation or inflation expectations that have adjusted higher.
Same thing for the UK, but In contrast to the UK, US economy that has high inflation, resilient growth, Euro, UK, they have high inflation, sluggish growth.
That's not, that, that's, that's not supportive of a stronger currency.
At the very, at the very minimum, it will limit downside to both the euro or, or the British pound, but it won't lead to a bullish upswing in those currencies.
Well, Elise, we will have to leave it there for today, but as always, great talking to you.
Thank you so much for joining us and have a great weekend.
Thank you, Remy.
