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USD unlikely to stage a solid rebound as Powell continues to strike a dovish policy tone – MUFG

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The USD has continued to trade on a softer footing this week. The US Dollar Index is falling back towards the 90.000-level around which it was trading at the start of the year. Federal Reserve Chair Jerome Powell downplayed inflation concerns, implying the greenback is unlikely to post a sustained rebound, according to economists at MUFG Bank.

Key quotes

“Fed Chair Powell continued to strike a dovish policy tone in line with expectations which has resulted in a limited market reaction. In the speech he highlighted the importance to the Fed of restoring a strong labour market while downplaying concerns over upside risks to inflation from loose monetary and fiscal policy.” 

“Chair Powell provided further reassurance as well that the Fed will make sure that they do not move to modify or even talk about modifying policy until they have seen that the US is through the pandemic. The Fed’s base case scenario is that the US will reach herd immunity around the middle of the year, which signals that any talk about beginning to taper QE is unlikely until later this year.” 

“The dovish comments from Chair Powell support our view that it’s too soon for the US dollar to stage a sustainable rebound on the back of expectations for tighter Fed policy.”

 

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