The US dollar has rebounded over the past two days and looks set to unwind much of last week’s fall. With US data somewhat mixed, much of this rebound in the greenback seems to have been driven by a reassessment of the outlook for other economies. With more bad news on that front likely, we see scope for the dollar to recover more ground over the coming weeks.
Next week’s central bank decisions appear unlikely to shift the dial significantly. Both the Fed and the ECB are widely expected to deliver 25bp hikes, and will probably stick to the “higher for longer” mantra that most G10 central banks have now adopted. As we set out here, we think that at this point there is some scope for expected interest rate differentials to move in favour of the US. Combined with our view that recessions in the US and Europe will drive renewed safe-haven dollar demand, we remain comfortable with our forecast for the greenback to rebound over the second half of the year.
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