A stronger than expected US economy is supporting the dollar, frustrating investors who had bet the US currency would weaken under the pressure of the expected interest rate cuts.
Driving the US currency's strength is a robust US economy that has made the Fed hesitant to ease monetary policy too quickly and risk an inflationary rebound.
US gross domestic product grew at a 3.2% annualized rate in the fourth quarter. By contrast, the eurozone's economy stagnated last year, China faces a deepening property crisis, and Japan unexpectedly slipped into recession at the end of 2023.
The dollar's strength will be tested this week as investors brace for Fed Chairman Jerome Powell to testify before lawmakers on Wednesday and Thursday and await US employment data at the end of the week. Signs that the Fed is sticking with its "higher for longer" messaging on rate cuts or that the US economy continues to stay strong could support the dollar's rally.
Investors are pricing in some 85 basis points of rate cuts for 2024, compared to more than 150 basis points they had factored in early January, futures tied to the Fed's policy rate showed.
A strong dollar could weigh on the outlook for US multinationals as it makes it more expensive to convert their foreign profits into dollars, while also making exporters' products less competitive abroad. According to FactSet, about a quarter of S&P 500 companies generate more than 50% of revenues outside the US.
Dollar strength could also complicate other central banks' efforts to fight inflation as it makes their currencies cheaper. The European Central Bank, which concludes its monetary policy meeting on Thursday, has also pushed back against rate cut talk due to sticky inflation. Signs that the euro zone's policymakers might further delay easing could boost the euro at the dollar's expense. Similar reasons are putting pressure on GBPUSD.
Investors are still bearish on the dollar, though the dollar's persistent strength is testing their outlook. While the median forecast among currency strategists is for the dollar to weaken over the rest of the year, around 80% believed there was a risk of the dollar exceeding their target.
Analysts at Capital Economics wrote that Trump's proposed tariff increases could shift the Fed back to a tightening bias on monetary policy and set off a wider trade war that spurs safe haven demand for the US currency. A stronger dollar is putting pressure on the British currency, which in turn is leading to the weakening of the GBPUSD pair.
The final recommendation is to sell GBPUSD.
The profit could be fixed at the level of 1.2500.
The stop loss could be placed at the level of 1.2850.
This content is for informational purposes only and is not intended to be investing advice.
