FX Daily: Dollar on unstable ground | Article

USD: Data continues to haunt the dollar

In yesterday’s FX Daily, we flagged the risk of fresh US data hitting the dollar given the recent scrutiny (and pessimistic narrative) by the market of the US growth story. That risk materialised as retail sales and industrial production came in softer than expected, triggering another round of dovish repricing in Federal Reserve rate expectations. The USD 2-year swap rate hit 4.35% yesterday, the lowest since early October, and the differential with the corresponding EUR rate is now very close to the -124bp December high. Our US economist now sees growing risks that the Fed may stop hiking after a 25bp move in February.

The correlation between the 2-year swap rate differential and EUR/USD has not been very strong in the past year but is picking up again. Most importantly, the weakness in the correlation largely derived from the…

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