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Can “King Dollar” draw investors’ gaze from “Goldilocks”?

The DXY index seems set to close this week at its strongest level in almost two months, breaking out of a narrow range amid a flurry of data releases out of the US. Consistent with Fed Chair Powell’s continued emphasis on data dependence, signs of softening wage growth in the employment cost index pushed down US rate expectations and the greenback, while a(nother) stronger-than-expected nonfarm payrolls report reversed those moves. For now, the timing and extent of Fed rate cuts currently discounted is broadly consistent with our view that resilience in the US economy is unlikely to prevent inflation from falling further there. That said, given this view appears fully discounted in markets (and implies the Fed easing policy in line with other major central banks), the risks in the short term remain skewed towards higher Treasury yields and a stronger dollar as continued US outperformance calls into question the prevailing “Goldilocks” narrative.

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