According to OCBC’s FX strategists Sim Moh Siong and Christopher Wong, the US Dollar (USD) rally has paused, with the currency softening overnight as global risk appetite improved [1]. The strategists highlight that the core Personal Consumption Expenditures (PCE) price index rose 0.3% month-on-month in May, matching consensus expectations, but remains at 3.4% year-on-year, which is well above the Federal Reserve’s (Fed) target [1].
OCBC notes that they have recently raised their USD forecasts, emphasizing that a stronger USD is not yet disruptive to markets [1]. The key risk identified is the continued outperformance of US economic growth compared to the rest of the world, as well as ongoing policy divergence, both of which could keep funding costs elevated and provide medium-term support for the USD [1].
The strategists stress that hawkish Fed risks remain alive, particularly as price stability is central to the Fed’s reaction function [1]. With reduced forward guidance from the Fed, each new data release on inflation, labor, and growth is expected to have a greater impact, likely increasing FX volatility and supporting the Dollar [1]. Jobless claims data are described as consistent with a stabilizing labor market, suggesting decent payroll growth for June [1].
CONCLUSION
The US Dollar's recent pause is attributed to improved global risk appetite, but OCBC strategists see ongoing support from US economic strength and policy divergence. Elevated inflation and steady labor data keep hawkish Fed risks in play, with increased data sensitivity likely to drive FX volatility in the near term.