US DOLLAR INDEX TO REACH NEW HIGHS BEYOND 94 AS TAPER TIMELINES REMAIN INTACT – WESTPAC

The US Dollar Index (DXY) in retreat as risk sentiment rebounds. But with the Federal Reserve still inching toward tapering and the European Central Bank (ECB) is unlikely to step off the gas anytime soon, DXY downside is likely limited to 91.5-92.0. Fresh marginal highs round 94.0 are on the cards into Q4, in the opinion of economists at Westpac.

A SLOWING OF ASSET PURCHASES CAN COMMENCE IN COMING MONTHS

“Our read is that while Fed officials note the risks of the delta strain, taper timeline remains intact. Key Fed officials at Jackson Hole and beyond likely remain confident that ‘substantial further progress’ is on the horizon and that a slowing of asset purchases can commence in coming months.”

“The Nov/Dec FOMC meetings look opportune for a taper announcement. That would leave the USD’s broad uptrend into Q4 intact, especially with key ECB officials pushing back on expectations they could slow PEPP purchases at their Sep meeting.”

“Fresh marginal DXY highs just beyond 94 are on the cards into Q4. Sustained DXY beyond that would require a setback in the Eurozone’s recovery path and/or further covid setbacks in China.”