USD unlikely to continue strengthening – Scotiabank

Last week, the US Dollar Index (DXY) closed lower in the biggest move against the USD since late December. Economists at Scotiabank analyze Greenback’s outlook.

Focus on PCE data this week

A relatively light data schedule today and some important data points ahead this week, namely the PCE data Thursday (which are expected to show a jump) may keep trading somewhat subdued on the session. But the softer USD tone perhaps warrants attention. 

The DXY has looked stretched in terms of (spread-driven) fair value in recent weeks; nominal and real interest rate spreads have shifted against the USD somewhat through February so far. The moves are limited but enough to curb the USD’s ability to continue strengthening, absent other supportive drivers. 

Seasonally positive trends for the USD will also start to wane as Q1 winds down. 

Short-term (1m) risk reversals continue to reflect a divergence with recent gains in the USD generally, suggesting weaker underlying sentiment backing the Dollar.