What has caught analyst attention of late has been the inability of the US Dollar to rally, despite data prints confirming the US economy to be in rude health.
This has ensured that the Dollar has not been able to drive the likes of EUR/USD and GBP/USD lower while at the same time maintaining just enough strength to ensure upside is limited.
Citi cite insufficient hawkishness or rate hike intention at the US Federal Reserve and the US Dollar being previously overbought by investors as reason for the currency’s lacklustre display.
However, in the medium- and long-term, increasing fiscal policy and hike rates by the Fed are likely to push the USD higher.
Two Reasons to be Bullish on the US Dollar:
- Increasing fiscal spending: Trump advocates increasing fiscal spending and infrastructure and tax cuts, which may underpin US and global economy. It may make the Fed tighten monetary policy more quickly, which may support USD.
- Fund inflows into the US: US corporations have around $1.2 trillion overseas. If Trump cuts corporate tax, fund inflows back into the US may underpin USD.
USD may have 6% upside against major currencies for the coming 6-12 months.
With rising political risk in Europe and USD likely to strengthen in the medium and long term, Citi say the EUR may be undermined.
EUR may drop to 0.98 for the coming 6-12 months.
Meanwhile, GBP may be undermined amid large UK fiscal and current account deficits and as the Bank of England may not hike rates until late 2019.
"GBP/USD may drop to 1.15 for the coming 6-12 months," say Citi.