UBS are US dollar bears unless politics tell us otherwise

UBS currency strategists on the U.S. dollar outlook. They said: "The USD enters the final third of 2024 with the DXY below its 200-day moving average and towards the low end of its 2024 range, leaving room for a tactical bounce if the Fed cuts by only 25bp on 18 Sep and modestly pushes back on pressure to cut by 50bp. But the carry premium in forward space that had supported the USD in H1 has gradually eroded which undermines the USD longer term. With the market open to the possibility of 50bp rate cuts by the Fed in a way that is not replicated in the assessment of other major central banks, we suspect it would take a surprising reversal higher again in US inflation data to turn the underlying trend back in favour of the dollar. Otherwise, an asymmetry to looking at the US labour market “glass half empty” can act as a USD negative. US elections in November are a potential source of directional change and high volatility. But the recent performance of VP Harris in polls has led markets to downgrade the odds of sweeping policy change and has left investors more inclined to trust the macro cycle than to chase a political one."

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