The US dollar bounced back on Monday, extending gains against almost all of its peers. The uncertainty generated by the Catalan situation has also forced traders to pull out of the single currency. Over the last few months, the euro had won the favour of investors at the expense of the greenback, amid rising uncertainty in the US political outlook as well as lacklustre economic data. Now that Republicans seem to have found a common about the much awaited tax reform, investors are more optimistic about the inflation and growth outlook in the world’s largest economy.
Last Friday, the release of disappointing PCE readings had only little effect on the investors’ optimism as both US treasury yields and the greenback quickly bounced back. The US 10-year sovereign rate rose to the highest level since July 11th, hitting 2.364%, while the dollar index returned to 93.60 after falling to 92.95 last week. It must be said that the speculation surrounding a potential shift at the head of the Federal Reserve, with the possible removal of Janet Yellen for a more hawkish candidate such as Kevin Warsh, has fuelled the yield rally.
We maintain our bullish stance on the US dollar as we believe the market hasn’t fully priced the upcoming rate hike together with the balance sheet reduction program, yet. However, we would stay cautious regarding further EUR weakness against the USD as another push, which can the take the form of a worsening of the Catalan situation, is needed.