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Dollar rebounds, but BBH expects only shallow relief rallies
Brown Brothers Harriman points to a partial USD recovery after Fed credibility concerns eased, while Fed funds futures still price roughly a 60.0% chance of a September rate hike.
The US dollar has recouped part of its recent losses as concerns about the Federal Reserve’s credibility ease, but Brown Brothers Harriman expects any rebound to be limited, according to FXStreet. Newsletter upgrade login analyst Elias Haddad said the USD has stabilized against most major currencies even as investors look for more clarity on near term rate expectations.
Haddad cited a balanced US labor market, wage growth consistent with the Fed’s 2.0% inflation target, and strong productivity growth supporting the disinflation outlook. He also noted that US 5 year 5 year inflation swaps have retraced much of their earlier move tied to Fed Chair Kevin Warsh failing to translate tougher inflation rhetoric into credible policy.
Still, the bank warned that USD relief rallies are likely to remain shallow because the currency is trading in line with interest rate differentials. FXStreet also highlighted that services hiring weakness could argue for Fed patience, but services price pressure has renewed, keeping upside inflation risks in view.
Among the near term drivers, the Q2 non farm productivity report is due, which could shape rate expectations, FXStreet said. Haddad added that services make up about 80% of the US economy, and stronger productivity growth has been a key disinflationary support, with Fed funds futures implying about a 60.0% probability of a September rate hike.